Document/Exhibit Description Pages Size
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2: EX-10 Material Contract 27 121K
3: EX-10 Material Contract 9 43K
4: EX-10 Material Contract 5 25K
5: EX-14 Material Foreign Patent 19 86K
6: EX-21 Subsidiaries of the Registrant 1 4K
7: EX-31 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
8: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 7K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________________________
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004 COMMISSION FILE NO. 000-49723
IGAMES ENTERTAINMENT, INC.
--------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0501468
------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
700 SOUTH HENDERSON ROAD
SUITE 210
KING OF PRUSSIA, PENNSYLVANIA 19406
--------------------------------------------------
(Address of principal executive offices, Zip Code)
(610) 354-8888
--------------
(Issuer's Telephone Number, including Area Code)
SECTION REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: None.
SECURITIES REGISTERED PURSUANT TO NAME OF EACH EXCHANGE
SECTION 12(G) OF THE ACT: ON WHICH REGISTERED:
--------------------------------------- ---------------------
Common Stock, par value $.004 per share None
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filings requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [ ]
The registrant's revenues for the most recent fiscal year were
$6,980,574.
The aggregate market value of the voting common stock and non-voting
common stock held by non-affiliates of the issuer, as of June 16, 2004 was
approximately $1,096,522 (based on the average closing bid and asked prices of
the registrant's common stock in the over-the-counter market).
As of June 16, 2004, 4,053,804 shares of the registrant's common stock,
par value $.004 per share, were issued and outstanding.
Documents Incorporated by Reference: None.
TABLE OF CONTENTS
PART I
ITEM 1 - DESCRIPTION OF BUSINESS.......................................... 1
ITEM 2 - DESCRIPTION OF PROPERTY..........................................11
ITEM 3 - LEGAL PROCEEDINGS................................................11
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............12
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........12
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........16
ITEM 7 - FINANCIAL STATEMENTS.............................................23
ITEM 8 - CHANGES IN AND DISCUSSIONS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................23
ITEM 8A - CONTROLS AND PROCEDURES .........................................23
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..............24
ITEM 10 - EXECUTIVE COMPENSATION...........................................25
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...28
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................30
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..30
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................31
FINANCIAL STATEMENTS......................................................F-1
(i)
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WE HAVE BASED THESE
FORWARD-LOOKING STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT
FUTURE EVENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND ASSUMPTIONS ABOUT US THAT MAY CAUSE OUR ACTUAL RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM
ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN SOME CASES, YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD,"
"COULD," "WOULD," "EXPECT," "PLAN," ANTICIPATE," BELIEVE," ESTIMATE," CONTINUE,"
OR THE NEGATIVE OF SUCH TERMS OR OTHER SIMILAR EXPRESSIONS. WE CAUTION THAT ANY
FORWARD-LOOKING STATEMENT MADE BY US IN THIS FORM 10-KSB OR IN OTHER
ANNOUNCEMENTS MADE BY US ARE FURTHER QUALIFIED BY IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION THE RISK FACTORS SET
FORTH IN THIS FORM 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We are a single source provider of cash access services to the gaming
industry. We have combined state-of-the-art technology with personalized
customer services to deliver the best in ATM, Credit Card Advance, POS Debit,
Check Cashing Services, CreditPlus outsourced marker services, and merchant card
processing. As the top suppliers to the gaming industry have consolidated
service offerings, we will meet the growing trend towards single source
providers of products and services to casinos and other gaming facilities
worldwide. This trend supports our business plan to identify fragmented segments
of the market to capitalize on merger and acquisition targets of synergistic
companies that support our business model.
We intend to become a leading innovator in cash access and financial
management services for the gaming industry. Our business model is specifically
focused on specialty transactions in the cash access segment of the funds
transfer industry. We deploy our services on a full service basis by providing
hardware, software and processing services to our customers. We also deploy our
services through licensing agreements pursuant to which we license to our
customers the right to use our technology and our customers provide their own
hardware, service and maintenance.
We have identified the gaming industry as a niche segment within the
funds transfer industry that has significant growth opportunities and has
historically returned cash flow margins in excess of 20%. We believe there is
significant value to having a proprietary position in each phase of the
transaction process in the niche markets where management has a proven track
record. We are confident that our full service and technology license deployment
strategy positions us to meet the needs of any gaming facility or jurisdiction
in the United States.
We have a team of experienced executives in the financial services and
gaming industries who have identified an opportunity to capitalize on the need
for an experienced, aggressive, service oriented company to provide a full range
of funds transfer services to the gaming and retail markets.
We currently have contracts to provide some or all of the cash access
services in 22 locations across the United States
In calendar year 2003, our cash access technology facilitated 892,915
transactions totaling $140,536,954. In calendar year 2004, we anticipate
facilitating over 5 million transactions totaling over $578,000,000.
PRODUCTS
We have developed four primary products: credit/debit card cash
advance, CreditPlus Credit Services, Automated Teller Machines (ATM's) and check
cashing solutions. These products are the primary means by which casinos make
cash available to gaming customers. We believe that we have a distinct advantage
in the cash access industry because we offer all four of these services.
CREDIT/DEBIT CARD CASH ADVANCE.
In March 2001, we introduced our first credit/debit card cash advance
("CCCA") product. Our CCCA products allow casino patrons to obtain cash from
their credit card, or checking account in the case of debit transactions,
through the use of our software and equipment.
In order to initiate a transaction, gaming patrons visit one of our
ATMs or kiosks located on the casino floor. Each kiosk houses a point-of-sale
terminal ("POS") equipped with our software. The ATM or kiosk terminal will
prompt the customer to swipe his/her credit or debit card and enter the dollar
amount requested. The terminal will then dial our centralized processing center
that electronically contacts the appropriate bank for an authorization or
disapproval. If authorized, the terminal will direct the customer to a casino
cage. Once at the cage, the customer will present his/her credit/debit card and
driver's license. A cage cashier will swipe the credit/debit card in one of our
terminals, which communicates with our central servers. After finding the
kiosk-approved transaction, a printer attached to the cage terminal will
generate a company check. The cashier will give the customer cash in the amount
requested after he/she endorses the system-generated check. The check is then
deposited by the casino into its account for payment from one of our bank
accounts and we debit the customer's credit card. This transaction can be
accomplished without the gaming customer using a personal identification number.
For credit card advances, customers pay a service charge typically between 6%
and 9% of the amount advanced.
We believe that we have several competitive advantages over competing
providers of CCCA services. First, our casino clients are able to access player
tracking and other valuable information from our website on a daily basis. This
information is collected when a customer uses our CCCA product. Competing
systems offer limited reporting, which typically is only available via hard copy
weeks after the month has ended. Our reporting is Internet-based and allows
customers to custom design a system to meet their reporting requirements. In
addition, customers have access to their information twenty-four hours a day,
seven days a week. Unique features of our PC-based systems are color,
touch-screen monitors, integration of all products in one interface, signature
capture technology and transaction prompting.
ATMS
Automated Teller Machines or "ATMs" are a growth market spurred on by
the development of less expensive "dial-up" automatic teller machines and the
opportunity to charge users transaction surcharges of up to $5.00 per
disbursement. We have access to all major bank networks and equipment suppliers.
Due to the highly fragmented nature of the ATM business, this service is highly
competitive, which has eroded margins and revenue growth potential. We are
currently providing gateway services to a wide range of national, regional and
international debit, credit and EBT networks. Additional links are being
established, including direct connections to national merchants as well as third
party, authorization and EBT providers. In addition to providing ATMs in
conjunction with other services, we have contracts to provide free-standing ATMs
to 18 customers and we currently operate 91 ATMs at those locations.
CHECK CASHING
Check cashing services may be provided at all of our casino operations.
When a casino patron requests check cashing at one of our service desks, we
initiate a check verification process using identification procedures and
software systems. Each transaction also provides additional data for our
customer database, which can be used in assessing the creditworthiness for the
particular customer. The system and software permit information to be gathered
and reported in an efficient and timely manner. We have designed and implemented
a credit rating system that utilizes this customer database to determine whether
a casino customer's check should be cashed. Check cashing involves the risk that
some cashed checks will be uncollectible because of insufficient funds, stop
payment orders, closed accounts or fraud. This risk of collection is greater in
new locations where the amount of data in our database is smaller. Unlike all
other companies providing check services, we do not use a credit scoring system,
as a credit scoring system will decline many checks that we believe are
acceptable risks. Currently, we only guarantee checks that are cashed in one of
our full service money centers, where our employees are facilitating the
transaction.
A second option for check cashing services is a check guarantee and
check verification process in which the casino uses POS terminals to scan the
customer's check and request remote authorization. We have formed an alliance
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with a third party provider to offer this service option to our customers. We
intend to either acquire a company operating in this segment of the industry or
to build a proprietary system to offer this service to our customers.
A third option is for a casino to license our proprietary check-cashing
software and manage its own check cashing services. For a monthly licensing fee,
we will install and support our proprietary Windows-based check-cashing software
and train casino personnel regarding its proper use. This software can either
stand-alone or integrate with our credit card advance system. This is the same
software that we use in our full service money centers. This program streamlines
the process from check approval through collection of bad checks. Casinos will
have access to our national database that will provide check credit histories
for customers in casinos nationwide. Since most casinos wish to manage this
process internally, we believe that there is significant revenue opportunity for
this product.
CREDITPLUS CREDIT SERVICES
Casinos in traditional gaming markets, like Las Vegas and Atlantic
City, rely on credit issuance for up to 40% of their revenues. These casinos
issue credit internally and rely on specialized credit reporting in their risk
management decisions. Significant capital investment in technology is required
for these credit transactions to be executed efficiently. Prior to the launch of
our CREDIT PLUS product there was only one company providing the specialized
credit reporting that the gaming industry relies on for their credit decisions.
Until recently, casinos in the $15 billion dollar a year Indian gaming
market had little or no ability to utilize credit issuance in their operations.
Under the state law compacts governing their operations, the majority of Indian
casinos are prohibited from offering credit to customers. Further, the capital
requirements necessary to develop the internal ability to offer credit on a
prudent basis prevented smaller properties from developing the capability. The
absence of a third party credit issuer capable of facilitating these
transactions compounded the problem.
Our CREDIT PLUS platform allows players in Indian casinos to receive
credit for the first time and, based on an average transaction fee of 10%,
CreditPlus positions us to be at the forefront of what we estimate to be a $2
Billion market. Currently we have a strong market position in providing credit
guarantee and credit management services to this highly profitable market.
The CREDIT PLUS product has three distinct elements: Credit Reporting,
Credit Management and Credit Guarantee.
CREDIT REPORTING. CreditPlus provides access to credit
reporting for casino transactions.
CREDIT MANAGEMENT. Like our check cashing management software,
CREDIT PLUS can be used to streamline the credit process from approval through
collection of bad debt. Casinos will have access to the CREDITPLUS system that
will provide check and credit histories for casino and retail patrons. Since
many casinos wish to manage this process internally, we believe there is
significant revenue opportunity with this product.
CREDIT GUARANTEE. Casino and retail customers can also access
cash through CREDITPLUS credit guarantee. The customer will fill out a
CREDITPLUS application. Upon approval, the CREDITPLUS system will generate a
marker for an amount up to the credit line that we approved. Each marker is
effectively a check drawn on the customer's checking account that we agree to
hold for up to 30 days. Most markers are repaid prior to the end of the holding
period. Fees are based on state regulations and the amount of time that we hold
the marker. In many cases, the customer will return to our location prior to our
deposit of the marker and request that a new holding period be established in
exchange for an additional fee. These transactions are approved and facilitated
at our full service money centers and shortly will be available through the
casino cage via an approval code transmitted through the CREDITPLUS system.
BUSINESS OBJECTIVES
Our business strategy is to focus in the following three areas to
maximize growth and return on investment for our business:
1. TECHNOLOGY DEVELOPMENT: Develop proprietary technology to manage and execute
the funds transfer transactions that are a part of our core business while
providing us with a competitive advantage in the markets that we serve. This
will enable us to maximize market penetration and realize significant profit
margins.
3
2. MERGERS/ACQUISITIONS: To identify and acquire companies for acquisition that
either have a strategic and financial fit to our long-term business model,
leverage our technology, or provide immediate market dominance.
3. SALES: We will continue to successfully and aggressively market our services
in the casino and retail markets.
TECHNOLOGY DEVELOPMENT. Due to ownership changes, personnel changes and
antiquated systems, the niche markets in the funds transfer industry that we
have identified have seen a substantial turnover in management, expertise and
industry direction. We believe that these markets are ripe for a state of the
art funds transfer system that will position us as the leader in the industry.
We have identified the following applications that we believe create
immediate value and will provide us with a competitive advantage in our core
markets.
o Integrated PC based POS transaction management system.
o Web or VPN based credit reporting system specific to the transactions
executed in Money Centers' core markets.
o Proprietary Transaction Gateway.
o Ticket Redemption Machines (TRM).
o Multi-purpose kiosks.
With few exceptions, our competition is operating on systems that are
outdated with few value-added capabilities. Our development personnel can
develop customized applications that will result in us being more competitive in
the marketplace and experiencing higher profit margins from new accounts.
Due to the growing variety of transactions that we are able to
facilitate, we have identified the opportunity to create a proprietary
transaction gateway for our services. This gateway will allow us to initiate,
execute and control all transactions executed through our installed customer
base. This strategy allows for faster integration and installation of new
accounts whether obtained through sales or acquisitions. Furthermore, as we
execute our acquisition strategy, the gateway will provide a seamless
integration of acquired components of the transaction process. We are also able
to license the use of this gateway technology for casino operators that want to
process and facilitate their own transactions without using a vendor.
MERGERS/ACQUISITIONS. We believe that we can accelerate penetration
into the markets we serve, while leveraging our management and technology,
through strategic acquisitions. Our primary targets will be those companies
that:
o Produce high margins in a niche segment of the funds transfer industry;
o Have a sustainable value proposition independent of the synergies with our
company;
o Provide services similar to those that we provide to our customers;
o Execute similar POS transactions in different market segments; or
o Utilize third party POS transaction management systems for their
transaction processing.
We believe that this strategy will be beneficial to us because:
o Focusing on companies with historically high margins is consistent with
our business plan.
o The acquisition of competing companies gives us the ability to immediately
"up sell" our CREDITPLUS and other products resulting in new revenue and
greater profits from acquired accounts.
o We can maximize our return on investment on technology development
strategy by leveraging our technology into new segments of the funds
transfer industry.
o By eliminating the third party POS system and installing our newly
developed system, we can immediately and significantly increase cash flow,
while obtaining a critical mass of new locations.
SALES
We believe that internal growth is the most efficient means for
increased revenue and profitability. Our sales strategy commenced with the
launch of the new POS transaction management system in March 2001. From the date
of the launch through the acquisition of Available Money, internal sales have
been responsible for 100% of
4
our revenue. The completion of the technology development and acquisition
strategy outlined above will provide the necessary product line and support
infrastructure for us to continue our growth through sales.
THE CASINO GAMING MARKET
Casino gaming in the United States has expanded significantly in recent
years. Once found only in Nevada and New Jersey, casino gaming has been
legalized in numerous states, including land-based casinos on Indian lands and
elsewhere, on riverboats and dockside casinos, and at horse racing venues. The
growth in gaming has resulted from legalization of gaming in additional
jurisdictions and the opening of new casinos in existing markets, as well as
from an overall increase in gaming activity.
Though the geographic expansion of casino gaming has slowed, we
anticipate continued growth as states struggle to fill large revenue gaps in
their state budgets. We also anticipate continued growth in the Indian Gaming
market as tribes are more successful at negotiating more stable and long-term
compacts with their respective state governments. The expansion of casino gaming
has generated a corresponding demand for ancillary services, including cash
access services in casinos. Third parties provide cash access services to most
casinos pursuant to contracts with the casino operator. We believe that the
principal objective of casino operators in providing or arranging for such
services is to promote gaming activity by making funds available to casino
customers on a convenient basis. In some cases, however, the casino operator may
view such services as a potential profit center separate from the gaming
operations.
Our business currently is concentrated in the casino industry and it
contemplates that its operations will continue to be focused on operations in
casinos and other gaming locations. Accordingly, a decline in the popularity of
gaming, a reduction in the rate of expansion of casino gaming, changes in laws
or regulations affecting casinos and related operations, or other adverse
changes in the gaming industry would have a material adverse effect on our
operations. We will continue our business plan to identify market segments
outside of gaming to diversify our revenue base while maintaining our operating
margins. Until this objective is achieved, there will always be a risk that our
current revenue is highly dependent on the success of the gaming industry.
Increased competition has prompted casino operators to seek innovative
ways to attract patrons and increase the frequency of return visits. We believe
that efficient and confidential access to cash for casino patrons contributes to
increased gaming volume. Credit/debit card cash advances, markers, check cashing
and ATMs are the three primary methods used by casinos to provide their patrons
with quick and efficient access to cash. Virtually all casinos in the United
States currently offer at least one of these services on their premises. While
some casino operators provide such services themselves, most casinos' cash
access services are provided by third parties pursuant to contracts with the
casino operators. We are unique in that we provide multiple options for the
delivery of these services. We offer systems that are run from the casino's
cage, systems that we operate with our employees out of leased space in the
casino, and we offer host programs where our employees facilitate transactions
remotely from the slot machine or gaming table.
CUSTOMER PROFILE
There are no boundaries when identifying potential casino customers. In
the near future, we will focus our marketing efforts on Native American Markets,
Las Vegas, Atlantic City, other commercial properties and riverboats.
We operate our cash access services pursuant to agreements with the
operators of the host casinos or approved resellers. Such agreements typically
have initial terms of one to five years, with renewal clauses. In most of the
agreements, either party may cancel the agreement with cause if the breach is
not cured within thirty days. We rely principally on our relationship with the
casino operators rather than on the terms of our contracts for the continued
operation of our cash access services. While there can be no assurance that the
agreements will be renewed after their initial terms, we believe that our
relationships with the casinos in which we operate are good.
GOVERNMENT REGULATION
Many states and Tribal entities require companies engaged in the
business of providing cash access services or transmitting funds to obtain
licenses from the appropriate regulating bodies. Certain states require
companies to post bonds or other collateral to secure their obligations to their
5
customers in those states. State and Tribal agencies have extensive discretion
to deny or revoke licenses. We have obtained the necessary licenses and bonds to
do business with the casinos where we currently operate, and will be subject to
similar licensing requirements as we expand our operations into other
jurisdictions.
As part of our application for licenses and permits, members of our
board of directors, our officers, key employees and stockholders holding five
percent or more of our stock must submit to a personal background check. This
process can be time consuming and intrusive. If an individual is unwilling to
provide this background information or is unsatisfactory to a licensing
authority, we must have a mechanism for making the necessary changes in
management or stock ownership before beginning the application process.
In order to address this issue, we intend to amend our Articles of
Incorporation so that no person may become the beneficial owner of five percent
or more of any class or series of our capital stock unless that person agrees in
writing to:
o provide to the relevant gaming authorities such information about himself
or herself as the authorities may require;
o respond to written or oral questions that the gaming authorities may
propound; and
o consent to the performance of any background check that the gaming
authorities may require, including the investigation of any criminal
record.
If a holder of five percent or more of our common stock does not agree
to these requirements, the proposed change provides for us to redeem all or a
portion of that person's shares by paying fair market value for the shares after
giving the holder 30 days notice of such redemption. The redemption price may be
paid, at the discretion of our board of directors, in cash or securities having
a fair market value equal to the value of the common stock being redeemed. Our
management believes that this procedure will give it flexibility to ensure
compliance with the background check requirements of the jurisdictions in which
it may seek gaming licenses.
While there can be no assurance that we will be able to do so, we
anticipate that we will be able to obtain and maintain the licenses necessary
for the conduct of our business.
Many suppliers to Native American casinos are subject to the rules and
regulations of the local tribal gaming commission. These gaming commissions have
authority to regulate all aspects of casino operations, including vendor
selection. Some gaming commissions require vendors to obtain licenses and may
exercise extensive discretion to deny or revoke licenses. We have obtained the
necessary licenses or approvals from the appropriate tribal gaming commissions
where we operate. While there can be no assurance that we will be able to do so,
we anticipate that we will be able to obtain and maintain the licenses and
approvals necessary for the conduct of our business.
Our business may also be affected by state and federal regulations
governing the gaming industry in general. Changes in the approach to regulation
of casino gaming could affect the number of new gaming establishments in which
it may provide cash access services.
COMPETITION
We have focused to a large extent on providing cash access services to
the gaming industry. In the cash access services market, we compete primarily
with Global Cash Access, LLC, Cash & Win and Game Financial Corporation.
Competition is based largely on price (i.e., fees paid to the casino from cash
access service revenues), as well as on quality of service to casino customers
and value-added features such as customer information provided to the casino. It
is possible that new competitors may engage in cash access services, some of
which may have greater financial resources. If we face significant competition,
we may have a material adverse effect on our business, financial condition and
results of operations. We cannot predict whether we will be able to compete
successfully against current and future competitors.
EMPLOYEES
We currently have 49 full time employees, of which 39 employees are
engaged in operations, two in sales and marketing, and eight in finance,
administration and management functions.
6
None of our employees are covered by a collective bargaining agreement,
and we believe that we have a good relationship with our employees.
RISK FACTORS
In addition to other information included in this report, the following
factors should be considered in evaluating our business and future prospects.
SIGNIFICANT EXPANSION OF OUR OPERATIONS MAY REQUIRE ADDITIONAL
EXPENSES, AND THESE EFFORTS MAY STRAIN OUR MANAGEMENT, FINANCIAL AND OPERATIONAL
RESOURCES.
If we cannot effectively manage our growth, then our ability to provide
services will suffer. Our reputation and our ability to attract, retain and
serve our customers depends upon the reliable performance of our CCCA and POS
Debit service, check & CreditPlus products, and ATMs, as well as our
infrastructure and systems. We anticipate that we will expand our operations
significantly in the near future, and further expansion will be required to
address the anticipated growth in our user base and to capitalize on market
opportunities. To manage the expected growth of our operations and personnel, we
will need to improve our existing systems and implement new systems, procedures
and controls. In addition, we will need to expand, train and manage an
increasing employee base. We will also need to expand our finance,
administrative and operations staff. Though historically we have managed our
growth effectively, there is no guarantee we will be able to effectively manage
our growth in the future. Our planned expansion in the near future will place,
and we expect our future expansion to continue to place, a significant strain on
our managerial, operational and financial resources. If we are unable to manage
growth effectively or if we experience disruption during our expansion, then our
business will suffer and our financial condition and results of operations will
be seriously affected. In addition, though we have recently renewed our existing
lines of credit, we will require additional financing in order to execute our
expansion plans. Additional financing may not be available to us, or if
available, then it may not be available upon terms and conditions acceptable to
us. If adequate funds are not available, then we may be required to delay,
reduce or eliminate our expansion plans.
WE HAVE APPROXIMATELY $8,456,538 IN INDEBTEDNESS AND APPROXIMATELY
$981,929 IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES. IF WE ARE UNABLE TO SATISFY
THESE OBLIGATIONS, THEN OUR BUSINESS WILL BE ADVERSELY EFFECTED.
As of March 31, 2004, we had indebtedness in the aggregate principal
amount of approximately $8,456,538 and accounts payable and accrued expenses of
approximately $957,889. Though our operating profits are sufficient to meet our
current obligations under our credit facilities, if we become unable to satisfy
these obligations, then our business will be adversely affected. Approximately
$5 to 7 million from the net proceeds of any additional financing will be used
to satisfy our existing loans and obligations which have matured or will mature
in the next twelve months and a portion of the net proceeds of any additional
financing may be used to pay down accounts payable and accrued expenses. Certain
of these obligations are secured by security interests in substantially all of
our assets granted to the lender. Accordingly, if we are unable to satisfy these
obligations, then our lender may sell our assets to satisfy the amounts due
under these loans. Any such action would have an adverse effect on our business.
In addition, due to our accumulated deficit of $10,224,394 as of March 31, 2004,
our net losses and cash used in operations of $6,634,586 and $158,948,
respectively, for the year ended March 31, 2004, our independent auditors have
raised substantial doubt about our ability to continue as a going concern. While
we believe that our present plan of operations will be profitable and will
generate positive cash flow, there is no assurance that we will generate net
income or positive cash flow in fiscal year 2005 or at any time in the future.
OUR BUSINESS IN CONCENTRATED IN THE GAMING INDUSTRY.
Our business currently is concentrated in the casino gaming industry,
and its plan of operation contemplates that it will continue to be focused on
operations in casinos and other gaming locations. Accordingly, a decline in the
popularity of gaming or the rate of expansion of the gaming industry, changes in
laws or regulations affecting casinos and related operations or the occurrence
of other adverse changes in the gaming industry, would have a material adverse
effect on operations.
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MOST OF OUR AGREEMENTS WITH CASINOS ARE OF A SHORT DURATION AND MAY NOT
BE RENEWED.
Our agreements with casino operators typically have initial terms of
one to five years, with renewal clauses. There can be no assurance that our
contracts will be renewed. We rely principally on our relationships with the
casino operators, rather than on the terms of our contracts, for the continued
operation of our funds transfer services.
In addition, we have entered into agreements with Indian tribes. Indian
tribes in the United States generally enjoy sovereign immunity from lawsuits,
similar to that of the United States government. The law regarding sovereign
immunity is unsettled. Though some of our contracts provide for a limited waiver
of immunity for the enforcement of our contractual rights, if any Indian tribe
defaults and successfully asserts its right of sovereign immunity, our ability
to recover our investment, or to originate and sell future Indian gaming
transactions, could be materially adversely affected.
WE FACE COLLECTION RISKS IN CASHING CHECKS PRESENTED BY CASINO PATRONS.
Like all companies engaged in the funds transfer business, we face
certain collection risks, especially with respect to check cashing services. We
attempt to minimize collection risks by utilizing disciplined procedures in
processing transactions. Nevertheless, our operations would be adversely
affected by any material increase in aggregate collection losses. Though we have
been effective in managing our credit risk in the past, we cannot predict
whether we will incur significant losses with respect to our check cashing
services in the future or whether such losses would have a material, adverse
effect on our financial condition.
WE ARE SUBJECT TO LICENSING REQUIREMENTS AND OTHER REGULATIONS.
We are subject to licensing requirements and other regulations in many
states and by Native American tribal entities. Regulators have significant
discretion to deny or revoke licenses. If we are unable to obtain a license
required to do business in a certain state or with a certain Native American
tribe, or if such a license is revoked, there would be significant negative
consequences, including possible similar action by other regulatory entities. In
addition, government laws and regulations may include limitations on fees
charged to consumers for cash access services. Changes in laws and regulations
could have a material, adverse effect on our operations.
THE EXERCISE OF STOCK OPTIONS AT PRICES BELOW THE MARKET PRICE OF OUR
COMMON STOCK COULD CAUSE A DECREASE OR CREATE A CEILING ON THE MARKET PRICE OF
OUR COMMON STOCK.
The exercise of issued and outstanding stock options and warrants into
5,620,000 shares of our common stock at an estimated average exercise price of
$.01 per share, will be below the market price of our common stock. The
existence of these options may have a depressing effect on the market price of
our common stock, and the exercise of these options, if accompanied by a sale of
the shares of common stock issued on exercise, may result in a decrease in the
market price of our common stock.
OUR SUCCESS DEPENDS ON MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES.
We believe that our ability to increase revenues, cash flow and
profitability will depend, in part, upon continued market acceptance of our
products and services, particularly our credit card cash advance products, POS
Debit, CreditPlus, ATM and check cashing products. We cannot predict whether
market acceptance of our existing products and services will continue or that
our new products and services will receive any acceptance from the marketplace.
Changes in market conditions in the gaming industry and in the financial
condition of casino operators, such as consolidation within the industry or
other factors, could limit or decrease market acceptance of our products and
services. Most of our business is based on one to five year agreements with
casino operators. We have been successful in renewing these agreements and in
attracting new customers. However, insufficient market acceptance of our
products and services could have a material, adverse effect on our business,
financial condition and results of operations.
WE MIGHT EXPAND THROUGH ACQUISITIONS, WHICH MAY CAUSE DILUTION OF OUR
COMMON STOCK AND ADDITIONAL DEBT AND EXPENSES.
Any acquisitions of other companies may result in potentially dilutive
issuances of our equity securities and the incurrence of additional debt, all of
which could have a material adverse effect on our business, results of
operations and financial condition. We plan to seek acquisitions and joint
ventures that will complement our
8
services, broaden our consumer base and improve our operating efficiencies.
Acquisitions involve numerous additional risks, including difficulties in the
assimilation of the operations, services, products and personnel of acquired
companies, which could result in charges to earnings or otherwise adversely
affect our operating results. There can be no assurance that acquisition or
joint venture opportunities will be available, that we will have access to the
capital required to finance potential acquisitions, that we will continue to
acquire businesses or that any acquired businesses will be profitable.
OUR SUCCESS WILL BE LARGELY DEPENDENT UPON OUR KEY EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL.
Our success will be largely dependent upon the continued employment of
our key executive officers and, particularly, our continued employment of
Christopher M. Wolfington. The loss of Mr. Wolfington's services would have a
material adverse effect on our operation. We believe that our continued success
will depend to a significant extent upon the efforts and abilities of our
executive officers and our ability to retain them. Although Mr. Wolfington has
entered into an employment agreement with us, and owns approximately 81% of our
issued and outstanding common stock on an as-converted basis, there is no
assurance that Mr. Wolfington will continue his employment with us. In addition,
we do not presently maintain insurance on the life of Mr. Wolfington. Although
we believe that we would be able to locate a suitable replacement for Mr.
Wolfington if his services were lost, we cannot assure you that we would be able
to do so. In addition, our future operating results will substantially depend
upon our ability to attract and retain highly qualified management, financial,
technical administrative personnel. Competition for highly talented personnel is
intense and can lead to increased compensation expenses. We cannot assure you
that we will be able to attract and retain the personnel necessary for the
development of our business.
WE WILL BE IN COMPETITION WITH COMPANIES THAT ARE LARGER, MORE
ESTABLISHED AND BETTER CAPITALIZED THAN WE ARE.
The entertainment industry is highly competitive, rapidly evolving and
subject to constant change. Our principal competitors in the credit/debit card
cash advance area are Global Cash Access, LLC, Cash & Win and Game Financial
Corporation. Many of our competitors have:
o greater financial, technical, personnel, promotional and marketing
resources;
o longer operating histories;
o greater name recognition; and
o larger consumer bases than us.
We believe that existing competitors are likely to continue to expand
their products and service offerings. Moreover, because there are few,
substantial barriers to entry, we expect that new competitors are likely to
enter the cash access services market and attempt to market financial products
and services similar to our products and services, which would result in greater
competition. We cannot be certain that we will be able to compete successfully
with these new or existing competitors.
THE HOLDERS OF OUR SERIES A PREFERRED STOCK HAVE REDEMPTION RIGHTS
THAT, IF EXERCISED, WOULD REQUIRE US TO REDEEM OUR ISSUED AND OUTSTANDING SHARES
OF SERIES A PREFERRED STOCK AND 2,500,000 ISSUED AND OUTSTANDING STOCK PURCHASE
WARRANTS IN EXCHANGE FOR THE ISSUED AND OUTSTANDING COMMON STOCK OF MONEY
CENTERS OF AMERICA, INC., THEREBY ELIMINATING A SIGNIFICANT PORTION OF OUR
EXISTING OPERATIONS.
The holders of our Series A Preferred Stock have redemption rights
that, if exercised, would require us to redeem our issued and outstanding shares
of Series A Preferred Stock and 2,500,000 issued and outstanding stock purchase
warrants in exchange for the issued and outstanding common stock of Money
Centers of America, Inc. Mr. Wolfington owns a majority of the issued and
outstanding shares of our Series A Preferred Stock. If these redemption rights
are exercised, we will lose a significant portion of our existing operations and
our results of operations will decline. In addition, there would also be
significant risk that our remaining operations would be eliminated as the vault
cash lines of credit and debt that we incurred in connection with our
acquisition of Available Money are guaranteed by Mr. Wolfington. These credit
facilities could potentially go into default as a result of the exercise of the
Series A Preferred redemption rights, which would leave us without the vault
cash necessary to operate our remaining business. While we are currently working
on a recapitalization plan that would eliminate the redemption rights of the
Series A Preferred Stockholders prior to their expiration on September 30, 2004,
there is no assurance that we will be able to reach an agreement on such
recapitalization plan.
9
SHARES OF OUR COMMON STOCK LACK A SIGNIFICANT TRADING MARKET.
Shares of our common stock are not eligible for trading on any national
or regional exchange. Our common stock is eligible for trading in the
over-the-counter market on the Over-The-Counter Bulletin Board. This market
tends to be highly illiquid, in part because there is no national quotation
system by which potential investors can trace the market price of shares except
through information received or generated by certain selected broker-dealers
that make a market in that particular stock. There are currently no plans,
proposals, arrangements or understandings with any person with regard to the
development of a trading market in our common stock. There can be no assurance
that an active trading market in our common stock will develop, or if such a
market develops, that it will be sustained. In addition, there is a greater
chance for market volatility for securities that trade on the Over-The-Counter
Bulletin Board as opposed to securities that trade on a national exchange or
quotation system. This volatility may be caused by a variety of factors,
including the lack of readily available quotations, the absence of consistent
administrative supervision of "bid" and "ask" quotations and generally lower
trading volume.
OUR SHARES OF COMMON STOCK ARE SUBJECT TO PENNY STOCK REGULATION.
Holders of shares of our common stock may have difficulty selling those
shares because our common stock will probably be subject to the penny stock
rules. Shares of our common stock are subject to rules adopted by the Securities
and Exchange Commission that regulate broker-dealer practices in connection with
transactions in "penny stocks". Penny stocks are generally equity securities
with a price of less than $5.00 which are not registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current price
and volume information with respect to transactions in those securities is
provided by the exchange or system. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission, which contains the following:
o a description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to
violation to such duties or other requirements of securities laws;
o a brief, clear, narrative description of a dealer market, including "bid"
and "ask" prices for penny stocks and the significance of the spread
between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary actions;
o definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks; and
o such other information and is in such form (including language, type, size
and format), as the Securities and Exchange Commission shall require by
rule or regulation.
Prior to effecting any transaction in penny stock, the broker-dealer also must
provide the customer with the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market
for such stock; and
o monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that, prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules.
10
A PROPOSED PROVISION IN OUR ARTICLES OF INCORPORATION THAT WOULD
REQUIRE 5% HOLDERS OF OUR COMMON STOCK TO CONSENT TO BACKGROUND CHECKS BY STATE
AND NATIVE AMERICAN REGULATORS AND STATUTORY PROVISIONS TO WHICH WE ARE SUBJECT
MAY HAVE THE EFFECT OF DETERRING POTENTIAL ACQUISITION PROPOSALS.
Many of the regulatory authorities that approve our licensing and many
of the Indian tribes with which we may do business perform background checks on
our directors, officers and principal shareholders. As a consequence, we intend
to amend our Articles of Incorporation to provide that a person may not hold 5%
or more of our securities without first agreeing to:
o consent to a background investigation,
o provide a financial statement and
o respond to questions from gaming regulators and/or Indian tribes.
Stockholders holding less than 5% of our outstanding securities could also be
subject to the same requirements. Such requirements could discourage acquisition
of large blocks of our securities, could depress the trading price of our common
stock and could possibly deter any potential purchaser of our company.
Our directors may be subject to investigation and review by gaming
regulators in jurisdictions where we are licensed or have applied for a license.
Such investigation and review of our directors may have an anti-takeover effect.
As a Nevada corporation, we are subject to an "anti-takeover" provision
of Chapter 78 of the Nevada Revised Statutes. This provision and the power of
the board of directors to issue additional securities may, in certain
circumstances, deter or discourage takeover attempts and other changes in
control of our company that are not approved by our board of directors.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR SHARES OF COMMON STOCK.
The future payment of dividends will be at the discretion of our Board
of Directors and will depend on our future earnings, financial requirements and
other similarly unpredictable factors. For the foreseeable future, we anticipate
that any earnings that may be generated from our operations will be retained by
us to finance and develop our business and that dividends will not be paid to
stockholders. Accordingly, the only income that our stockholders may receive
will be derived from the growth of our stock price, if any.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters is located at 700 South Henderson Road,
Suite 210, King of Prussia, Pennsylvania 19406 and occupies approximately 1,200
square feet of office space. These offices are located in a building owned by
affiliates of our chief executive officer and this space has been provided at no
cost. We are currently negotiating a lease that will require us to begin making
market rate lease payments for the use of this office space. We anticipate that
our future rent for this office space will be approximately $3,000 per month. We
also have an equipment staging and technology office located in Golden Valley,
Minnesota, and a product development office located in Boca Raton, FL. The
current lease obligations for the Minnesota and Florida offices are
approximately $738 per month and $3,450 per month, respectively. We believe that
our current facilities are adequate to conduct our business operations for the
foreseeable future. If these premises were no longer available to us, we believe
that we could find other suitable premises without any material adverse impact
on our operations.
ITEM 3. LEGAL PROCEEDINGS
On March 24, 2004, we filed a complaint in United States District Court
for the District of Delaware against Equitex, Inc. and its wholly-owned
subsidiary, Chex Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we
allege that Equitex and Chex committed numerous breaches of the terms of the
November 3, 2003 Stock Purchase Agreement pursuant to which we were to have
acquired Chex from Equitex, including (i) false representations and warranties
related to terminated Chex casino contracts and over $600,000 in bad debts, (ii)
material misrepresentations in SEC filings, (iii) entering into a material
financing transaction in violation of the covenant not to enter into
transactions outside the ordinary course of business, and (iv) failure to
proceed in good faith toward closing, including notifying iGames that Equitex
could not close on the transaction as structured. These
11
breaches entitled us to terminate the Stock Purchase Agreement and receive a
$1,000,000 termination fee and reimbursement of our transaction costs (estimated
at over $750,000) from Equitex and Chex. Our complaint also states that Chex
wrongfully and tortiously declared a default under the $2,000,000 promissory
note that we issued to Chex in connection with our acquisition of Available
Money, and that Equitex and Chex tortiously interfered with our relationship
with our senior lender. We seek to recover the $1,000,000 termination fee and
transaction costs together with significant damages that resulted from the
defendants' breaches and tortuous conduct.
On March 23, 2004, Equitex filed an action in Delaware state court
concerning the same Stock Purchase Agreement at issue in the Delaware federal
action that we filed, alleging that Equitex was entitled to terminate the Stock
Purchase Agreement and receive a $1,000,000 termination fee and reimbursement of
transaction costs. We removed this action to the Delaware federal district
court. We are vigorously defending this action and believe that Equitex's and
Chex's claims are unfounded. We have filed a counterclaim that restates the
claims made in the federal action that we filed. We expect that the two Delaware
federal actions will be combined into a single case.
On March 15, 2004, Chex filed a complaint in the District Court of the
State of Minnesota for the County of Hennepin against us alleging that we
defaulted on interest payments on a $2,000,000 promissory note evidencing our
obligation to repay a loan that Chex extended to us in connection with our
acquisition of Available Money (the "Minnesota Complaint"). The Minnesota
Complaint seeks payment of the principal balance of the loan and accrued
interest thereon. Chex further alleged that we are liable to them for a penalty
fee of $1,000,000 as the result of the alleged termination by Equitex of the
November 3, 2003 Stock Purchase Agreement. We subsequently removed the Minnesota
Complaint to the United States District Court for the District of Minnesota. On
June 23, 2004, the United States District Court for the District of Minnesota
transferred this action to the United States District Court for the District of
Delaware. We anticipate that this action will be consolidated with the other
actions listed above that are pending in to the United States District Court for
the District of Delaware. We are vigorously defending this action, which is
still in the pleadings stage, and believe that Chex's claims lack merit.
In addition, we are from time to time, during the normal course of our
business operations, subject to various litigation claims and legal disputes. We
do not believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol "IGME.OB".
MARKET INFORMATION
Our shares of common stock were first quoted on the Over-The-Counter
Bulletin Board on October 14, 2002. The following table presents the high and
low bid prices per share of our common stock as quoted for the years ended March
31, 2004 and March 31, 2003 which information was provided by NASDAQ Trading and
Market Services. All amounts have been retroactively adjusted to reflect a
1-for-4 reverse stock split that occurred on December 11, 2003.
Fiscal Year ended March 31, 2004
-----------------------------------------------------------
Quarter ended: High Bid Low Bid
-------- -------
June 30, 2003 3.72 1.80
September 30, 2003 3.04 1.60
December 31, 2003 1.60 .27
March 31, 2004 1.80 .56
12
Fiscal Year ended March 31, 2003
-----------------------------------------------------------
Quarter ended: High Bid Low Bid
-------- -------
December 31, 2002 5.32 2.80
March 31, 2003 5.20 3.32
The above quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not reflect actual transactions. On July 8, 2004,
the closing bid price for our common stock was $.33 per share.
HOLDERS
As of June 15, 2004 we had 43 stockholders of record of our common
stock. Such number of record holders was derived from the records maintained by
our transfer agent, Florida Atlantic Stock Transfer.
DIVIDENDS
To date, we have not declared or paid any cash dividends and do not
intend to do so for the foreseeable future. Prior to our merger with Money
Centers of America, Inc., Money Centers of America, Inc. paid dividends to its
shareholders. In 2003, these dividends were approximately $200,000. We currently
have a liability for declared but unpaid dividends of $25,000 that occurred
prior to closing of the Money Centers of America, Inc. merger. In the future we
intend to retain all earnings, if any, to finance the continued development of
our business. Any future payment of dividends will be determined solely in the
discretion of our Board of Directors.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
[Enlarge/Download Table]
Number of
securities to be
issued upon
exercise of Weighted average Number of securities
outstanding exercise price of remaining available for
options, warrants outstanding options, future issuance under
and rights warrants and rights equity compensation plans
----------------- -------------------- -------------------------
Equity compensation plans approved by
security holders 0 $0.00 0
Equity compensation plans not approved
by security holders 7,269,064 $1.05 6,817,500
----------------- -------------------- -------------------------
Total 7,269,064 $1.05 6,817,500
There were no other securities authorized for issuance under equity
compensation plans at March 31, 2004.
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
The following is a summary of transactions during the preceding three
years involving sales of our securities that were not registered under the
Securities Act of 1933. All share figures reflect the 1-for-4 reverse stock
split that occurred on December 11, 2003.
In July 2001, in connection with the organization, we issued an
aggregate of 1,357,500 shares of common stock to our founders for total cash
consideration of $23,000 in private transactions exempt from registration under
the Securities Act in reliance on Section 4(2) of said act. Each of the founders
was an accredited investor, had access to relevant information and provided
suitable investment representations.
13
Between August and November 2001, we sold 2,455,000 units in a private
placement to 43 investors in an offering that was conducted in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder. Each
unit consisting of one quarter of a share of common stock and a common stock
purchase warrant to purchase one quarter of a share of common stock at an
exercise price of $4.00 per share expiring on December 31, 2005. We received
gross proceeds of $1,227,500 in this offering. VFinance Investments, Inc. a
broker-dealer, acted as our placement agent in this offering, and we issued
VFinance Investments, Inc. an aggregate of 75,000 shares of common stock and
common stock purchase warrants to purchase 30,688 shares of common stock at an
exercise price of $4.00 per share expiring on December 31, 2005 as compensation
for its services, and issued 6,250 shares of common stock to its legal counsel
as compensation for their services in the offering. The issuances were made in
reliance on Section 4(2) of the Securities Act. None of the foregoing warrants
have been exercised as of the date hereof.
In September 2001, we issued 5,000 shares of common stock to a former
officer as compensation with a deemed value of $9,000 in a private transaction
exempt from registration under the Securities Act in reliance on Section 4(2)
thereunder.
On March 1, 2002, we sold for $100,000 to a single investor a 10%
convertible promissory note due September 1, 2002 in the principal amount of
$100,000 pursuant to the exemption afforded by Section 4(2) of the Securities
Act. The note is convertible into unregistered shares of common stock and common
stock purchase warrants.
In August 2002, we issued options to acquire 25,000 shares of our
common stock to a consultant; such options are exercisable at $0.40 per share
and expire three years from the grant date. We recognized $41,330 in non-cash
compensation relating to the issuance of these options. Subsequently, in April
2003, we agreed with the consultant to cancel these options and to issue 25,000
shares of common stock as compensation for the services provided. These shares
were valued at $71,000.
In August 2002, we issued options to acquire 6,250 shares of our common
stock to an employee; such options are exercisable at $0.40 per share and expire
three years from the date of the grant. We valued these options at $10,333 or
approximately $1.65 per option.
In September 2002, we sold 375,000 units consisting of one share of its
common stock and one warrant to purchase a share of common stock (exercisable at
$4.00) for $2.00 per unit to seven investors. We received proceeds from this
stock sale of $652,500, which is net of offering costs paid of $97,500. None of
the foregoing warrants have been exercised as of the date hereof.
In October 2002, a note of $150,000 was converted into 75,000 shares of
our common stock.
In October 2002, we issued 37,500 shares of its restricted common stock
to one of our directors who provided both financial and marketing consulting
services. Such shares were valued at the fair market value on the date of the
grant. We recorded $172,500 in noncash compensation.
In October 2002, 2,500 shares of our previously issued shares were
cancelled.
During the year ended March 31, 2003, we issued 300,000 shares of our
common stock to employees and consultants for services rendered. Accordingly, we
have recorded $772,000 ($2.00-$5.20 per share), net of deferred compensation of
$62,500, in compensation to reflect the issuance of these shares.
In February 2003, we issued 75,000 shares of our common stock for the
patent right to our Table Slots product. The shares were valued at the
approximate fair market value on the date of the agreement.
In March 2003, we sold 1,030,000 units consisting of one quarter of a
share of our common stock and a warrant to purchase one quarter of a share of
common stock (exercisable at $1.50) for $0.50 per unit to eight accredited
investors. We received proceeds from this stock sale of $448,050, which is net
of offering costs paid of $66,950. Additionally, we issued 1,250 shares of its
common stock as part of the offering costs of this capital raise. None of the
foregoing warrants have been exercised as of the date hereof.
In May 2003, we issued options to purchase 62,500 shares of our common
stock at an exercise price of $2.04 per share to our former chief executive
officer pursuant to the terms of his employment agreement. These options were
issued under our stock option plan in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
14
In June 2003, we sold 500,000 units to a single investor consisting of
one quarter of a share of our common stock and a warrant to purchase one quarter
of a share of common stock (exercisable at $1.00) for $0.50 per unit. We
received proceeds from this stock sale of $235,000, which is net of offering
costs paid of $15,000. None of the foregoing warrants have been exercised as of
the date hereof.
In June 2003, we issued 80,000 shares of our restricted common stock to
consultants for services rendered. We valued these shares at $2.84 per share and
recorded noncash compensation expense of $144,800. The amortization of deferred
compensation resulted in a noncash compensation expense of $18,750 for the
quarter June 30, 2003.
In July 2003, we issued 62,500 shares of restricted common stock to our
chief executive officer pursuant to the terms of his employment agreement. We
valued these shares at $2.28 per share, the fair market value of our common
stock on the date of grant.
In October 2003, we sold 100,000 units to a single accredited investor
consisting of one quarter of a share of our common stock and a warrant to
purchase one half of a share of common stock (exercisable at $1.20) for $0.25
per unit. We received proceeds from this stock sale of $25,000. None of the
foregoing warrants have been exercised as of the date hereof.
In October 2003, we sold 25,000 units consisting of one share of our
common stock and two warrants to purchase a share of our common stock at an
exercise price of $0.60 per share. The purchase price of these units was $.25
per unit and we received gross proceeds from this stock sale of $25,000. The
units, shares of common stock and warrants were sold pursuant to Section 4(2) of
the Securities Act.
In October 2003, we issued 81,750 shares of our common stock to three
consultants for services rendered. We valued the shares at a contemporaneous
sales price on the date of issuance and recorded consulting expense of $147,690
or between $1.80, and $1.88 per share. These shares were issued pursuant to
Section 4(2) of the Securities Act.
In October 2003, pursuant to the terms of an asset purchase agreement,
we purchased the Random X 21 product by issuing 75,000 restricted shares of
common stock to the seller as payment of 50% of the purchase price. The
remaining 50% of the purchase price consisting of 75,000 restricted shares of
common stock will only be granted when the Company has placed at least 150 units
of this table game within casinos under standard licensing/leasing agreements.
These shares were issued pursuant to Section 4(2) of the Securities Act.
Also, in October 2003, we issued 4,542 shares of our common stock to
employees. We valued the shares at a contemporaneous sales price on the date of
issuance and recorded salary expense of $8,175 or $1.80 per share, respectively.
These shares were issued pursuant to Section 4(2) of the Securities Act.
In November 2003, in order to secure the performance of the Company's
obligations under a new line of credit, the Company granted the lender a
continuing lien on and security interest in 250,000 newly issued shares of its
common stock. These shares were issued pursuant to Section 4(2) of the
Securities Act.
Also, in November 2003, we issued options to purchase 62,500 shares of
our common stock at an exercise price of $2.00 per share to our former chief
executive officer pursuant to the terms of his employment agreement. These
shares were issued pursuant to Section 4(2) of the Securities Act.
In December 2003, we issued 25,000 shares of our common stock to a
consultant for services rendered. We valued the shares at a contemporaneous
sales price on the date of issuance and recorded consulting expense of $37,000
or $1.48 per share. These shares were issued pursuant to Section 4(2) of the
Securities Act.
Additionally, in December 2003, we issued 5,000 shares of our common
stock to a consultant for services rendered. The Company valued the shares at a
contemporaneous sales price on the date of issuance and recorded consulting
expense of $6,600 or $1.32 per share. These shares were issued pursuant to
Section 4(2) of the Securities Act.
15
On January 2, 2004, we issued 1,351,640 shares of our Series A
Preferred Stock and warrants to purchase 2,500,000 shares of our common stock to
the stockholders of Money Centers of America, Inc. pursuant to an Agreement and
Plan of Merger dated November 26, 2003, in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
and Rule 506 thereunder.
In January 2004, we issued options to purchase 2,635,000 shares of our
common stock to Christopher M. Wolfington and options to purchase an aggregate
of 490,000 shares of our common stock to 16 of our employees and consultants
under our stock option plan. The securities were issued in transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
Additionally, in January 2004, we issued 25,000 shares of our common
stock to a consultant for services rendered. We valued these shares at a
contemporaneous sales price on the date of issuance and recorded consulting
expense of $30,000 or $1.20 per share. All of these shares were issued pursuant
to Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to the risks discussed in this report.
HISTORY
iGames was incorporated in the State of Florida on May 9, 2001 under
the name Alladin Software, Inc. On June 25, 2001, it changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary. On January 2, 2004, iGames acquired Money
Centers pursuant to the merger of Money Centers with a wholly-owned subsidiary
of iGames formed for that purpose. In addition, on January 6, 2004, iGames
acquired the stock of Available Money, the operator of free-standing ATM
machines in casinos. The business operations of Available Money have been
combined with those of Money Centers.
The merger with Money Centers was accounted for as a reverse
acquisition. Although we were the legal acquirer in the merger, Money Centers
was the accounting acquirer since its shareholders acquired a majority ownership
interest in our company. Consequently, the historical financial information
included in the financial statements prior to January 2004 is that of Money
Centers. All significant intercompany transactions and balances have been
eliminated. We do not present pro forma information as the merger is a
recapitalization and not a business combination.
From inception until the acquisition of Money Centers, we were engaged
in developing, marketing, and distributing gaming and security applications for
the casino, hospitality, and entertainment industries. However, with the
acquisition of Money Centers and Available Money, we have ceased these
activities and have focused on the development and expansion of Money Centers'
business.
Money Centers was incorporated in the State of Delaware in 1997, but
was inactive until 1999. Money Centers' business model is to be an innovator and
industry leader in cash access and financial management services for the gaming
industry. Within the funds transfer and processing industries there exists niche
markets that are capable of generating substantial operating margins without the
requirement to process billions of dollars in transactions that is the norm for
the industry. We believe there is significant value to having a proprietary
position in each phase of the transaction process in the niche markets where
management has a proven track record. The gaming industry is an example of such
a market and is currently where we derive the majority of our revenues. We have
identified other markets with similar opportunities, however we have not
executed any plans to exploit these markets at this time.
From October 1999 until March 2001, Money Centers was a development
company focusing on the completion of a Point of Sale ("POS") transaction
management system for the gaming industry. In March 2001, Money Centers
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA. With the acquisition of Available Money, we currently provide
services in 22 locations across the United States.
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CURRENT OVERVIEW
We are aggressively pursuing our integration and conversion plans
relating to the merger and acquisition transactions completed in January 2004.
As a result of these transactions, we have shifted our focus from our gaming and
security applications business to our cash access services business. In fiscal
2004, we experienced significant write-offs of obsolete inventory and non-cash
charges for impairment of intangible assets based on this change of business
plan. These items contributed to our net loss in fiscal 2004 and we do not
anticipate that these items will have any material effect on our operating
results in fiscal 2005 or thereafter.
Part of the anticipated benefits of our acquisition of Available Money
will be derived from converting the processing of the Available Money cash
services business over to the systems utilized by Money Centers. These
conversions are timely and expensive, as they include the purchase of new ATM
hardware. We anticipate that this conversion will cost us approximately $600,000
in fiscal 2005.
Money Centers met or exceeded its projected transaction levels for
fiscal 2004. The additional expenses incurred in January, February and March
2004 reflect the integration and conversion of the acquired or merged businesses
into our business. We recently began executing our plan to reorganize our
operational structure to accommodate the addition of Available Money's
customers. This has resulted in a restructuring of management, certain layoffs
and additions to the management and sales team.
We generate revenues from transaction fees associated with each unique
service we provide, including ATMs, credit card advances, POS Debit, check
cashing, markers and various other financial instruments. We receive our fees
from either the casino operator or the consumer who is requesting access to
their funds. The pricing of each transaction type is determined by evaluating
risk and costs associated with the transaction in question. Accordingly, our
transaction fees have a profit component built into them. This is why the gaming
industry, which is recognized for its high transaction volume, is such a
lucrative market. Furthermore, reimbursement for electronic transactions are
guaranteed by the credit or debit networks and associations that process the
transactions as long as procedures are followed, thereby virtually eliminating
trade accounts receivable.
Companies providing cash access services to the gaming industry face
some unique challenges and opportunities in the next ten years. Many companies
in the industry have merged, been acquired or have recapitalized in order to
capitalize on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry
recognized cash flow margins that were unmatched in the funds transfer and
processing industries. Growing competition and the maturing of the market has
resulted in a decline in these margins as companies have begun marketing their
services based on price rather than innovation or value added services. This
trend is highlighted by the number of companies that promote revenue growth and
an increased account base but experience little increase in net income. This
trend is magnified by the fact that the largest participant in the industry has
close to 70% market share and has begun to forgo margin in order to retain
business. Companies that can adapt to the changing market and can create
innovative products and services stand at the forefront of new wave in revenue
and profit growth.
Substantially all gaming facilities provide ATM services, credit card
cash advances, debit, and/or check cashing services to their customers. Services
are typically outsourced and provided on an exclusive basis for an average of
two to five years. Each year, approximately 400 accounts totaling $300 million
in revenue are put out to bid. Currently there are five major companies,
including us, that have proprietary systems to compete for this business.
Although this market has matured from a pricing perspective, the demand for the
services from the end user is still strong.
Like most maturing markets, the companies that succeed are those that
are capable of reinventing themselves and the markets they serve. We believe
that smaller gaming properties will always look to have cash access services
provided in the traditional manner. There are several major trends occurring in
the gaming industry that will have a major impact on our industry and will
determine which companies emerge as industry leaders:
1. CONSOLIDATION OF MAJOR CASINO COMPANIES THAT WILL PUT PRESSURE ON OTHER
MAJOR CASINO COMPANIES TO FOLLOW SUIT AND WILL PUT PRESSURE ON SMALLER
CASINO COMPANIES TO FOCUS ON SERVICE AND VALUE ADDED AMENITIES IN ORDER
TO COMPETE.
The consolidation of the major gaming companies will make it difficult
to continue to offer our services in the traditional manner. The economics are
too compelling for the gaming operators not to consider internalizing these
17
operations in order to generate additional revenue and profits to service the
debt associated with the consolidation. We have prepared for this change and
have already begun to offer our systems and services through the issuance of
Technology and Use Agreements. Instead of outsourcing the cash services
operations, we have begun to offer turn-key processing capabilities for internal
use by the casino. This means casinos will license our technology so they can
operate and maintain their own cash access services, including the addition of
their merchant card processing. Our size makes us uniquely capable of adapting
to this change. Though the license agreements do not have the same revenue
potential as a traditional cash services contract, the net income derived from
these agreements is higher, the user agreements are for a longer period of time
and we do not have the same capital expenditures or vault cash requirements that
we experience in performing traditional cash access services. Furthermore, our
larger competitors have spent years trying to conceal the economic benefits of
this type of offering because their large infrastructure is designed to only
support an outsourced solution.
2. TICKET IN-TICKET OUT TECHNOLOGY GROWTH EXCEEDING EXPECTATIONS.
The first major casino company to remove coins from the casino floor
was Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers
have developed a technology that prints and accepts bar-coded tickets at the
slot machine instead of accepting or dispensing coins. It was originally
anticipated that it would take 10-15 years for the industry to fully adopt this
technology. It appears it may only take half this amount of time. This presents
a problem to casino operators. They now have tens of thousands of bar-coded
tickets a day that need to be redeemed for cash. This has paved the way for
self-service ticket redemption technology so customers do not have to go to the
casino cage in order to redeem their tickets. The initial ticket redemption
machines placed in service have proven to be too big and too expensive. Most
casino operators have to wait until budget season to appropriate the necessary
funds in order to even consider the acquisition of the required equipment. We
believe this functionality will ultimately reside on the ATM machine thus
eliminating the requirement to purchase new equipment and eliminating the need
to remove a slot machine to make room for a stand-alone ticket redemption
device. We are developing technology that will allow ticket-redemption
functionality on our cash access devices. There is still the problem of security
with the bar-coded ticket, which is as good as cash. Many casino operators will
refuse to allow vendors to handle the tickets for security and fraud concerns.
This is an additional economic benefit of our plan to have the casino operator
internalize their cash access services because only the casino's personnel will
handle the tickets in the situations where they are licensing our services.
3. EXECUTION OF LONG-TERM AND STABLE COMPACTS FOR INDIAN CASINOS IN
NUMEROUS STATE JURISDICTIONS HAS MADE TRADITIONAL CAPITAL MORE READILY
AVAILABLE PAVING THE WAY FOR A NEW WAVE OF EXPANSION AND THE RESULTING
NEED FOR NEW SOURCES OF REVENUE AND CUSTOMER AMENITIES.
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Indian casinos has made traditional capital more readily available to tribes,
leading many tribes to undertake expansion of casino facilities and operations.
In order to support this expansion, Indian casino operators will seek
new sources of revenues and new amenities to attract and retain more quality
customers. One of the most critical customer amenities in casino operations is
the availability of credit. Traditional gaming markets, such as Las Vegas and
Atlantic City, rely on credit issuance for up to 40% of their revenues. These
markets issue credit internally and rely on specialized credit reporting in
their risk management decisions. Significant capital investment in technology is
required for these transactions to be executed efficiently. However, within the
$15 billion dollar Indian Gaming market there are virtually no credit services
currently available. Approximately 26 of 29 states that have approved Indian
Gaming do not allow the Tribes or their respective casinos to issue credit. The
lack of credit play is also due to the lack of a third party credit issuer that
is capable of facilitating the transactions. Our CREDIT PLUS platform allows
Indian casinos to issue credit to players, providing Indian casinos with a guest
amenity that is already widely accepted in traditional jurisdictions.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
18
Organic growth through sales by internal salespeople is usually the
most efficient and profitable growth strategy in the cash services business.
Much of Money Centers' historical growth has occurred in this manner. We realize
that recognizing industry trends is no assurance of success. We continue to view
strategic acquisitions as part of our business plan to obtain the critical mass
we believe is necessary to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development
is capital intensive and presents substantial risk. There is no guarantee that
we will be able to manage all three strategies effectively.
We believe that it is necessary to increase our working capital
position so that we can capitalize on the profitable trends in the industry
while maintaining and servicing our current customer base. A major risk to our
business is that we utilize working capital for future growth at the expense of
executing on our integration and conversion plans. This would result in
substantially higher operating costs without the assurance of additional
revenues to support such costs.
CRITICAL ACCOUNTING POLICIES
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
CHECK CASHING BAD DEBT. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the check is subsequently honored by the bank, we recognize the amount of the
check as a negative bad debt. This conservative accounting policy may at times
overstate the impact of bad checks on our financial results, and adoption of a
different accounting policy could have a material impact on our reported
results.
GOODWILL AND LONG-LIVED INTANGIBLE ASSETS. The carrying value of
goodwill as well as other long-lived intangible assets such as contracts with
casinos is reviewed if the facts and circumstances suggest that they may be
impaired. With respect to contract rights in particular, which have defined
terms, this will result in an annual adjustment based on the remaining term of
the contract. If this review indicates that the assets will not be recoverable,
as determined based on our discounted estimated cash flows over the remaining
amortization period, then the carrying values of the assets are reduced to their
estimated fair values in accordance with Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"). The calculation of fair value includes a number of estimates
and assumptions, including projections of future income and cash flows, the
identification of appropriate market multiples and the choice of an appropriate
discount rate.
We account for intangible assets as follows: licensing and patent
agreements are stated at cost. The recoverability of the license and patent
agreements is evaluated each year based upon management's expectations relating
to the life of the technology and current competitive market conditions.
STOCK BASED COMPENSATION. We account for stock based compensation
utilizing Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. We have chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the estimated fair market value of our stock at the date
of the grant over the amount an employee must pay to acquire the stock. We have
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148
(See New Accounting Pronouncements), which require pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied.
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RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 2004 vs. Fiscal Year Ended March 31, 2003
[Enlarge/Download Table]
FISCAL 2004 ($) FISCAL 2003 ($) CHANGE ($)
--------------- --------------- ----------
Net Income (Loss) (6,634,586) 451,036 (7,085,622)
Revenues 6,980,574 3,211,256 3,769,318
Operating Expenses 6,407,069 2,440,295 3,966,774
Selling, General and Administrative Expenses 6,398,542 796,807 5,601,735
Other Income (Expenses) (809,549) 476,882 (1,286,431)
Our net loss increased in fiscal 2004 due to approximately $5,560,000
in non-cash compensation expenses incurred as a result of issuing options to
purchase 3,120,000 shares of our common stock at a below market exercise price
to employees and consultants, an approximate $418,000 loss on impairment of
intangible assets and an approximate $131,000 write-off of obsolete inventory,
both of which were incurred as a result of our decision to focus on our cash
access services business and to cease pursuing our former plan of operations. We
also experienced additional general and administrative expenses of approximately
$650,000 related to our acquisition of Available Money, our merger with Money
Centers and our terminated acquisition of Chex Services, Inc.
Our revenues increased in fiscal 2004 due to Money Centers' addition of
the Sycuan Casino as a customer, which resulted in approximately $4,000,000 in
additional revenues and the acquisition of Available Money at the beginning of
the fourth quarter of fiscal 2004, adding 91 ATM's at 18 locations throughout
the United States. In addition, Money Centers experienced increased transaction
volume. In calendar year 2003, Money Centers' POS system facilitated 892,915
transactions (75% increase over calendar year 2002) totaling $140,536,954 (44%
increase over calendar year 2002) generating over $5.5 million in revenue (63%
increase over calendar year 2002). Assuming no additional customer sales, for
calendar year 2004 we are on pace to facilitate over 5.0 million transactions
totaling over $578,000,000. Our results of operations and revenue growth
exceeded expectations though our number of new accounts was lower than
anticipated. We were successful in launching two major products that are
essential to our future success; CreditPlus and our Cash Services Host Program,
both of which are currently generating new revenues and profits.
Our operating expenses increased in fiscal 2004 due to the transaction
processing expenses and casino commissions related to the increase in our
transaction volume. In addition, some of the new casino contracts provided for
higher casino commissions than under our existing contracts. Also, based on our
higher level of operations, we had 38 operations employees at the end of fiscal
2004 as compared to 23 operations employees at the end of fiscal 2003, which
resulted in additional compensation and benefits expenses and non-cash
compensation expense due to the grant of 270,000 options to these employees at
below market interest rates.
Our selling, general and administrative expenses increased in fiscal
2004 due to non-cash compensation expenses incurred as a result of issuing
options to purchase 2,850,000 shares of our common stock at a below market
exercise price to employees and consultants. The issuance of these securities
was necessary in order to ensure the retention of our management team, the
retention of Money Centers' key employees and the recruitment of our independent
directors. We also experienced additional general and administrative expenses of
approximately $650,000 for legal fees, accounting and auditing fees, travel and
other expenses related to our acquisition of Available Money, our merger with
Money Centers and our unsuccessful effort to acquire Chex Services, Inc.
Our other expenses increased due to an approximate $418,000 loss on
impairment of intangible assets and an approximate $131,000 write-off of
obsolete inventory, both of which were incurred as a result of our decision to
focus on our cash access services business and to cease pursuing our former plan
of operations. In addition, we incurred additional interest expense due to
higher interest rates charged by our senior lender and a larger amount of cash
advanced under our vault cash lines of credit to provide the cash necessary to
service our additional transaction volume. In fiscal 2003, our other income was
due to a gain on forgiveness of indebtedness. A similar gain did not occur in
fiscal 2004.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the fiscal year
ended March 31, 2004 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
20
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2004 FISCAL 2003 $ CHANGE
----------- ----------- --------
Cash Flows From Operating Activities (128,948) 792,090 (921,038)
Cash Flows From Investing Activities (218,544) (61,819) (156,725)
Cash Flows From Financing Activities 502,155 (652,916) 1,115,071
Net cash provided by operating activities decreased in Fiscal 2004
primarily due to our significant net loss offset by the write-off of obsolete
inventory, our loss on impairment of intangible assets, our significant increase
in non-cash compensation due to the grant of warrants and stock options at below
market exercise prices and our increase in commissions payable, accounts payable
and accrued expenses.
Net cash used by investing activities increased in fiscal 2004 due to
our purchase of property and equipment in connection with the Sycuan Casino
contract and the purchase of intangible assets in connection with our
acquisition of Available Money and our merger with Money Centers.
Net cash provided by financing activities increased in fiscal 2004 due
to our increase in notes payable, proceeds from lines of credit and loans
payable, offset by dividends paid and increases in restricted cash.
Our available cash equivalent balance at March 31, 2004 was
approximately $232,000 and was approximately $2,148,000 at May 31, 2004. From
inception through March 31, 2003, we raised an aggregate of approximately
$2,500,000 in capital through the sale of our equity securities. In addition, we
issued two 10% convertible promissory notes in the aggregate principal amount of
$250,000 to one investor. In October 2002, this investor converted a $150,000
note into 300,000 shares of our common stock, and from July 2003 through
December 2003, we repaid an additional $81,500 of this debt. We intend to repay
the remaining principal balance of this note of $18,500 in fiscal 2005.
In January 2004, we completed our merger with Money Centers and our
acquisition of Available Money. Each of Money Centers and Available Money have
established operations. In addition, Money Centers has an existing vault cash
line of credit of $3,000,000. All of this line of credit is available to fund
our vault cash needs. We must obtain the consent of the lender to use any of
this line to fund our other operating expenses. Management believes that these
sources of cash flow will be sufficient to fund our operations for at least the
next twelve months.
A significant portion of our existing indebtedness is associated with
our line of credit of $3,000,000 with Mercantile Capital, L.P., which we use to
provide vault cash for our operations. Vault cash is not working capital but
rather the money necessary to fund the float, or money in transit, that exists
when customers utilize our services but we have yet to be reimbursed from the
Debit, Credit Card Cash Advance, or ATM networks for executing the transactions.
Although these funds are generally reimbursed within 24-48 hours, due to the
magnitude of our transaction volume, a significant amount of cash is required to
fund our operations. Our vault cash loan accrues interest at the base commercial
lending rate of Wilmington Trust Company of Pennsylvania plus 10.75% per annum
on the outstanding principal balance, with a minimum rate of 15% per annum, and
has a maturity date of May 31, 2005. Our obligation to repay this loan is
secured by a first priority lien on all of our assets.
We also have $6,000,000 of debt associated with our acquisition of
Available Money. $2,000,000 of this indebtedness is payable in 1,470,589 shares
of our common stock or cash to the previous shareholders of Available Money at
our discretion. The terms of the Stock Purchase Agreement allow for certain
purchase price adjustments associated with this indebtedness that may lower the
actual amount we are required to pay. The actual amount paid will not be
determined until certain events outlined in the Stock Purchase Agreement have
materialized.
An additional $2,000,000 of this indebtedness is a loan provided by
Chex Services, Inc. We have filed suit against Chex Services regarding certain
breaches to the term note evidencing our obligation to repay this loan and
breaches to a Stock Purchase Agreement entered into by the parties in November
2003. It is our position that the damages we suffered as a result of the
breaches by Chex Services, Inc. exceed the principal amount of this loan. We
will continue to record this note as a liability until a judgment is rendered in
the lawsuit.
21
The final $2,000,000 of this indebtedness is a bridge loan provided by
Mercantile Capital, L.P. This bridge loan accrues interest at an annual rate of
17% and has a maturity date of May 1, 2005. Our obligation to repay this loan is
secured by a first priority lien on all of our assets. We intend to refinance
this obligation in fiscal 2005. We paid a facility fee of $41,000 in connection
with this loan.
Though we anticipate our operating profits to be sufficient to meet our
current obligations under our credit facilities, if we become unable to satisfy
these obligations, then our business will be adversely affected as Mercantile
Capital will execute its lien and sell our assets to satisfy any amount of
outstanding indebtedness under our line of credit loan or our term loan that we
are unable to repay.
We also have a substantial amount of accounts payable and accrued
expenses. To the extent that we are unable to satisfy these obligations as they
come due, we risk the loss of services from our vendors and possible lawsuits
seeking collection of amounts due.
In addition, we have an existing obligation to redeem 37,500 shares of
our common stock from an existing stockholder at an aggregate price of $41,250.
This obligation arose in connection with our purchase of certain gaming software
products for 75,000 shares of our common stock. In order to complete this
transaction under these terms, our former management granted this stockholder
the option to have 37,500 shares of his stock redeemed. This stockholder has
elected to exercise this redemption option.
We are also in the process of converting out all of the former
Available Money ATMs that are presently processed by Fifth Third Bank and
replacing them with new ATMs, which we will process through our own systems. As
part of this process we will replace all of the ATMs at the locations that
Available Money presently provides ATM service. Under the agreement with Fifth
Third Bank, Fifth Third Bank recognized all revenues and expenses from these
ATMs, and Available Money recognized only its share of net income generated by
these ATMs. Following this conversion. We will recognize all revenues and
expenses from the ATMs, resulting in increased revenues and operating expenses
of approximately $9,800,000 and $8,200,000, respectively, per year. We
anticipate that this conversion will cost approximately $600,000 to complete in
fiscal 2005. As we plan to process all transactions at these ATMs, we will
recognize all fees generated as revenues. If we did not convert these ATM's and
allowed their transactions to be processed by a third party, then we would only
be permitted to record the fees net of processing costs as revenues.
Our goal is to change the way our customers view cash access services
through transforming the way casinos find, serve and retain their customers. We
will strive to make our customers the best they can be by continuing to grow and
improve everything we do. We require significant capital to meet these
objectives. Our capital requirements are as follows:
o Equipment: Each new account requires hardware at the location level and
some additions to network infrastructure at our central server farm.
o Vault Cash: All contracts in which we provide full service money
centers and ATM accounts for which we are responsible for cash
replenishment require vault cash. Vault cash is the money necessary to
fund the float that exists when we pay money to patrons but have yet to
be reimbursed from the Debit, Credit Card Cash Advance, or ATM networks
for executing the transactions.
o Acquisition Financing: We presently have little to no cash for use in
completing additional acquisitions. To the extent that we cannot
complete acquisitions through the use of our equity securities, we will
need to obtain additional indebtedness or seller financing in order to
complete such acquisitions.
o Working Capital: We will require substantial working capital to pay the
costs associated with our expanding employee base and to service our
growing base of customers.
o Technology Development: We will continue to incur development costs
related to the design and development of our new products and related
technology. We presently do not have an internal staff of engineers or
software development experts and intend to outsource this function.
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
22
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
The holders of our Series A Preferred Stock have redemption rights
that, if exercised, would require us to redeem our issued and outstanding shares
of Series A Preferred Stock and 2,500,000 issued and outstanding stock purchase
warrants in exchange for the issued and outstanding common stock of Money
Centers of America, Inc. If these redemption rights are exercised, we will lose
a significant portion of our existing operations and our results of operations
will decline. In addition, there would also be significant risk that our
remaining operations would be eliminated as the vault cash lines of credit and
debt that we incurred in connection with our acquisition of Available Money are
guaranteed by the majority holder of the Series A Preferred Stock. These credit
facilities could potentially go into default as a result of the exercise of the
Series A Preferred redemption rights, which would leave us without the vault
cash necessary to operate our remaining business. While we are currently working
on a recapitalization plan that would eliminate the redemption rights of the
Series A Preferred Stockholders prior to their expiration on September 30, 2004,
there is no assurance that we will be able to reach an agreement on such
recapitalization plan.
We do not pay and do not intend to pay dividends on our common stock.
We believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business. We presently have a liability
for dividends payable of $25,000 related to dividends declared by Money Centers
prior to our merger that have not yet been paid.
Due to our accumulated deficit of $10,224,394 as of March 31, 2004, our
net losses and cash used in operations of $6,634,586 and $158,948, respectively,
for the year ended March 31, 2004, our independent auditors have raised
substantial doubt about our ability to continue as a going concern. While we
believe that our present plan of operations will be profitable and will generate
positive cash flow, there is no assurance that we will generate net income or
positive cash flow in fiscal year 2005 or at any time in the future.
ITEM 7. FINANCIAL STATEMENTS
Our consolidated financial statements for Fiscal Years 2004 and 2003
and footnotes related thereto are included within Item 13(a) of this report and
may be found at pages F-1 through F-21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of March 31, 2004, we carried out an evaluation of the effectiveness
of the design and operation of our "disclosure controls and procedures" (as
defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision
and with the participation of our management, including Christopher M.
Wolfington, our Chief Executive Officer and Chief Financial Officer. Based upon
that evaluation, Mr. Wolfington concluded that our disclosure controls and
procedures are effective.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management to allow timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried out this evaluation.
23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16 (A) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions of our
directors and executive officers and executive officers of our major operating
subsidiaries as of June 15, 2004.
Name Age Current Position(s) with Company
---- --- --------------------------------
Christopher M. Wolfington 39 Chairman of the Board of Directors,
Chief Executive Officer and President
Jeremy Stein 36 Director
Barry R. Bekkedam 37 Director
Wayne A. DiMarco 38 Director
All directors serve until their successors are duly elected and qualified.
Vacancies in the Board of Directors are filled by majority vote of the remaining
directors. The executive officers are elected by, and serve at the discretion of
the Board of Directors.
A brief description of the business experience during the past five
years of our director, our executive officers and our key employees is as
follows:
CHRISTOPHER M. WOLFINGTON - Chairman, Chief Executive Officer,
President and Treasurer. Mr. Wolfington has been in the financial services
industry for approximately 16 years. He has been the Chairman of Money Centers
since its inception. From 1991 to 1994 he was a partner in The Stanley Laman
Group, a firm providing investment, insurance, mergers, acquisition, and
planning services to companies nationwide. From 1995 to 1998 he was President of
Casino Money Centers, a subsidiary of CRW Financial, Inc. Mr. Wolfington
received a Bachelor of Arts degree in Communications and Business from the
University of Scranton.
JEREMY STEIN - Secretary and Director. Mr. Stein served as President
and Chief Executive Officer and a director of iGames from June 2002 until
January 2004, and as President, Secretary and a director of iGames since January
2004. Mr. Stein has also served as the Chief Executive Officer of IntuiCode,
LLC, a software development company, since 2000 and as a senior software
engineer with Mikohn Gaming Corporation, where he worked until 2001. Prior
thereto, he was a senior software engineer and director of Progressive Games,
Inc. from 1995 to 1998 and the Chief Technical Officer of Emerald System, Inc.
from 1993 to 1995. Mr. Stein studied computer science at Virginia Tech. See
"Related Party Transactions."
BARRY BEKKEDAM - Director. Mr. Bekkedam has served as a member of our
board of directors since January 2004. Mr. Bekkedam is the chairman of the board
of directors and chief executive officer of Ballamor Capital Management, Inc.,
an investment advisory firm located in Wayne, Pennsylvania that he founded in
1997. Ballamor Capital Management, Inc. is an objective investment advisory firm
that provides consultative services to families and individuals of wealth. Mr.
Bekkedam received a Bachelors of Science in Accounting from the College of
Commerce and Finance at Villanova University.
WAYNE DIMARCO - Director. Mr. DiMarco has served as a member of our
board of directors since January 2004. Mr. DiMarco is the president of P.
DiMarco & Co., Inc., a privately owned highway and heavy construction site
development company based in King of Prussia, Pennsylvania. Mr. DiMarco received
a Bachelors of Science in Civil Engineering from Lehigh University.
There are no family relationships among any of our directors or
executive officers.
AUDIT COMMITTEE
The Audit Committee oversees our processes of accounting and financial
reporting and provides oversight with respect to our audits and financial
statements. In this role, the Audit Committee reviews the professional
24
services provided by our independent accountants and the independence of the
accounting firm from our management. The Audit Committee also reviews the scope
of the audit performed by our independent accountants, our annual financial
statements, our systems of internal accounting controls and other matters with
respect to the accounting, internal auditing and financial reporting practices
and procedures as it finds appropriate or as may be brought to its attention.
The Audit Committee is comprised of Messrs. Bekkedam and DiMarco, each of whom
is independent as defined by the requirements of The Nasdaq Stock Market and the
rules and regulations of the Securities and Exchange Commission. We do not
presently have a member of our audit committee that qualifies as an "audit
committee financial expert" under the SEC's rules. We are presently conducting a
search for additional independent directors; at least one of whom we anticipate
will meet the requirements of an audit committee financial expert. The Audit
Committee did not meet in fiscal 2004 but has met twice in fiscal 2005 with
respect to the review of our annual financial statements for fiscal 2004.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires our directors,
executive officers and persons who are the beneficial owners of more than ten
percent of our common stock (collectively, the "Reporting Persons") to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and to furnish us with copies of these reports.
Prior to January 2, 2004, the date of the merger, Jeremy Stein had one
late filing of a Form 4. Pursuant to his employment agreement, Mr. Stein
received 250,000 shares of common stock on July 8, 2003 and did not file his
Form 4 until October 27, 2003. Based on our review of Forms 3 and 4 filed with
the Securities and Exchange Commission, we do not believe that any of the other
Reporting Persons had delinquent filings pursuant to Section 16(a) of the
Securities Exchange Act.
CODE OF ETHICS
We have adopted a code of ethics that applies to our executive
officers, all other employees and each member of our Board of Directors. Our
Board of Directors adopted the code of ethics in June 2004. We will provide a
copy of our code of ethics to any person without charge, upon request. The
request should be made in writing and addressed to Christopher M. Wolfington,
iGames Entertainment, Inc., 700 South Henderson Road, Suite 210, King of
Prussia, Pennsylvania 19406. Additionally, our code of ethics is included as an
exhibit to this Annual Report on Form 10-KSB. We intend to disclose any
amendments or waivers to our code of ethics on our website, which is located at
www.igamesentertainment.com.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued during the
fiscal year ended March 31, 2004 ("Fiscal 2004") and the fiscal year ended March
31, 2003 ("Fiscal 2003") to our Chief Executive Officer and the most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 during such fiscal year (collectively, the "Named Executives").
[Enlarge/Download Table]
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------ ------------
Fiscal Year Number of
Ended Other Annual Shares or
Name and Principal Position March 31 Salary Bonus Compensation Options
------------------------------------- ----------- ----------- ----------- ------------ ------------
Christopher M. Wolfington, Chairman, 2004 $ 90,429 $200,000 $ 14,051 2,635,000(2)
Chief Executive Officer, President(1)
Jeremy Stein, President(3) 2004 $115,750 $ 8,000(4) $ 0 125,000(5)
2003 $ 50,000(6) $ 0 $ 0 62,500(7)
______________
25
(1) Mr. Wolfington was appointed our Chairman, Chief Executive Officer and
President on January 2, 2004, effective upon the consummation of our
acquisition of Money Centers of America, Inc. Prior to that date, he was
President of Money Centers of America, Inc., a position he still holds. All
compensation figures are for the period commencing January 2, 2004.
(2) Pursuant to his employment agreement Mr. Wolfington received options to
purchase 2,635,000 shares of Common Stock.
(3) Mr. Stein served as our Chief Executive Officer, President and a director
from April 31, 2002 until January 2, 2004, and as Secretary, Treasurer and
a director thereafter.
(4) This bonus was not paid as of March 31, 2004 and was recorded as an accrued
expense at that time.
(5) Pursuant to his employment agreement Mr. Stein received options to purchase
62,500 shares of our common stock at an exercise price of $2.04 per share
and options to purchase 62,500 shares of our common stock at an exercise
price of $2.00 per share in Fiscal 2004.
(6) Mr. Stein began taking salary as of November 1, 2002 at the rate of
$120,000 per annum.
(7) Pursuant to his employment agreement Mr. Stein received a grant of 62,500
shares of our common stock on the effective date of his employment
agreement.
OPTION GRANTS FOR THE FISCAL YEAR ENDED MARCH 31, 2004
Pursuant to his employment agreement, Mr. Wolfington received grants of
options to purchase an aggregate of 2,635,000 shares of our common stock in
Fiscal 2004. Each of these options has an exercise price of $.01 per share and
is exercisable for a period of ten years from the date of grant. These grants
represent approximately 90.6% of the options granted to our employees in fiscal
2004.
Pursuant to his employment agreement, in Fiscal 2004 Mr. Stein received
grants of options to purchase 62,500 shares of our common stock at an exercise
price of $2.04 per share and options to purchase 62,500 shares of our common
stock at an exercise price of $2.00 per share. These grants represent
approximately 4.3% of the options granted to our employees in fiscal 2004.
The following table sets forth information concerning year-end option
values for Fiscal 2004 for the executive officers named in our Summary
Compensation Table above.
[Enlarge/Download Table]
FISCAL YEAR END OPTION VALUES
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
----------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------- ------------ ------------- ------------- -------------
Christopher M. Wolfington 2,635,000(1) 0 $1,449,250(2) $0
Jeremy Stein 125,000(3) 0 $0(2) $0
______________
(1) Consists of options to purchase 2,635,000 shares of our common stock at an
exercise price of $.01 per share.
(2) Based on a closing sales price of $.56 per share on March 31, 2004.
(3) Consists of options to purchase 62,500 shares of our common stock at an
exercise price of $2.04 per share and 62,500 shares of our common stock at
an exercise price of $2.00 per share.
LONG TERM INCENTIVE PLANS
We currently do not have any long-term incentive plans.
26
COMPENSATION OF DIRECTORS
Our directors who are also employees do not receive any additional
consideration for serving on our board of directors. Our outside directors, who
are not employees, receive $2,500 for each meeting of the board of directors or
any committee thereof that they attend. In addition, our outside directors will
receive an initial grant of 25,000 shares of restricted stock that vest in
accordance with a schedule determined by our chief executive officer and annual
grants of options to purchase 25,000 shares of our common stock at an exercise
price equal to the closing sales price of our common stock on the date of grant.
EMPLOYMENT AGREEMENTS
In November 2002 we entered into an employment agreement with Mr.
Stein. As there is no term to this agreement, Mr. Stein is an employee at-will.
Mr. Stein's compensation is $120,000 per annum with any increases subject to
review and approval by our Board of Directors. Pursuant to his employment
agreement, Mr. Stein is entitled to participate in all health and other benefits
programs that cover substantially all of the Company's employees. On the date he
entered into the employment agreement, Mr. Stein was granted options to purchase
250,000 shares of common stock at an exercise price equal to the closing bid
price on the date of grant. In addition, every six months during the term of his
employment agreement, Mr. Stein is entitled to receive an additional grant of
options to purchase 62,500 shares of common stock (split-adjusted) with an
exercise price equal to the closing bid price of the Company's common stock on
the date of grant.
In January 2004, we entered into a five-year employment agreement with
Christopher M. Wolfington, our Chairman, President and Chief Executive Officer.
In addition to an annual salary of $350,000 per year (subject to annual
increases at the discretion of the Board of Directors) (the "Base Salary"), Mr.
Wolfington's employment agreement provides for a $200,000 signing bonus, a
guaranteed bonus equal to 50% of his Base Salary in any calendar year (the
"Guaranteed Bonus") and a discretionary incentive bonus of up to 50% of his Base
Salary in any calendar year pursuant to a bonus program to be adopted by the
Board of Directors (the "Incentive Bonus"). Pursuant to his employment
agreement, Mr. Wolfington is entitled to fringe benefits including participation
in retirement plans, life insurance, hospitalization, major medical, paid
vacation, a leased automobile and expense reimbursement. In addition, Mr.
Wolfington received options to purchase 760,000 shares of our common stock at an
exercise price of $.01, which are immediately vested, and options to purchase
1,875,000 shares our common stock at an exercise price of $.01, which have
vested due to the issuance of a commitment letter by Mercantile Capital, L.P. to
refinance our vault cash and working capital financing. In addition, we have
agreed to grant Mr. Wolfington options to purchase an aggregate of 3,530,780
shares of our common stock, which shall vest upon our achievement of certain
cash flow objectives in 2004 to be defined by the Board of Directors. The Board
of Directors have not yet defined these objectives and we have not yet granted
these options to Mr. Wolfington. In the event there is a change of control after
which Mr. Wolfington is asked to relocate his principal business location more
than 35 miles, his duties are significantly reduced from the duties he had
immediately prior to the change of control or there is a material reduction in
his Base Salary in effect immediately prior to the change of control and, as a
result of any of the foregoing, Mr. Wolfington resigns his employment hereunder
within one year after the date of the change of control, then Mr. Wolfington
shall be entitled to receive as severance payments, his Guaranteed Bonus, his
Base Salary and his insurance benefits for a period equal to the greater of the
initial term of the agreement or 24 months from the date of the termination or
cessation of Mr. Wolfington's employment. For purposes of Mr. Wolfington's
employment agreement, a change of control occurs if we sell all or substantially
all of our assets or if shares of our capital stock representing more than 50%
of the votes which all stockholders are entitled to cast are acquired, by
purchase, merger, reorganization or otherwise) by any person or group of
affiliated persons not an affiliate of iGames at the time of such acquisition.
REPRICING OF OPTIONS
We have not adjusted or amended the exercise price of any stock
options.
27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
INFORMATION AS TO OWNERSHIP OF COMMON STOCK BY OFFICERS, DIRECTORS AND OWNERS OF
5% OR MORE OF OUR COMMON STOCK
The following table sets forth, as of June 15, 2004, certain
information with respect to beneficial ownership of our common stock as of June
15, 2004 by:
o each person known to us to be the beneficial owner of more than 5% of
our common stock;
o each of our directors;
o each of our executive officers; and
o all of our executive officers and directors as a group.
Unless otherwise specified, we believe that all persons listed in the table
possess sole voting and investment power with respect to all shares of our
common stock beneficially owned by them. As of June 15, 2004, 4,053,804 shares
of our common stock were issued and outstanding.
[Enlarge/Download Table]
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER (1) POSITION BENEFICIAL OWNERSHIP (1) PERCENTAGE OF CLASS
---------------------------- -------- ------------------------ -------------------
Christopher M. Wolfington President, Chief 5,030,000 (2)(3) 55.4%
700 South Henderson Road Executive Officer,
King of Prussia, PA 19406 Chairman of the
Board
Jeremy Stein Director 267,500 (4) 6.4%
301 Yamato Road, Suite 2199
Boca Raton, FL 33431
Michele Friedman Beneficial Owner 985,000 24.3%
17621 Circle Pond Court
Boca Raton, FL 33496
Wayne DiMarco Director 45,000 (5) 1.1%
131 East Church Road
King of Prussia, PA 19406
Barry Bekkedam Director 20,000 (6) *
1200 Liberty Ridge Drive
Suite 340
Wayne, PA 19087
Bomoseen Associates, L.P. (7) Beneficial Owner 518,750 (8) 12.0%
1 PPG Plaza, Suite 2970
Pittsburgh, PA 15222
Theodore Stern (7) Beneficial Owner 535,000 (9) 12.4%
1 PPG Plaza, Suite 2970
Pittsburgh, PA 15222
------------------ ------------------------ -------------------
All Executive Officers and
Directors as a group (4 persons) 5,237,500 58.0%
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. All shares are beneficially
owned and sole voting and investment power is held by the persons named,
except as otherwise noted.
28
(2) Does not include shares of common stock issuable upon conversion of issued
and outstanding shares of Series A Convertible Preferred Stock as these
shares are not presently convertible and it is not presently contemplated
that these shares will be convertible within the next 60 days. These shares
are convertible into 12,435,090 shares of our common stock under certain
circumstances. If Mr. Wolfington elects to convert these shares of Series A
Convertible Preferred Stock, then he will own approximately 81.2% of our
issued and outstanding shares of common stock.
(3) Includes currently exercisable options to purchase 2,635,000 shares of
Common Stock and currently exercisable warrants to purchase 2,395,000
shares of Common Stock.
(4) Includes currently exercisable options to purchase 62,500 shares of Common
Stock at an exercise price of $2.04 per share and currently exercisable
options to purchase 62,500 shares of Common Stock at an exercise price of
$2.00 per share.
(5) Includes currently exercisable options to purchase 20,000 shares of Common
Stock.
(6) Includes currently exercisable options to purchase 20,000 shares of Common
Stock.
(7) Theodore Stern exercises voting and dispositive control over the shares
owned by Bomoseen Associates, L.P.
(8) Includes currently exercisable warrants to purchase 256,250 shares of
Common Stock.
(9) Includes currently exercisable warrants to purchase 256,250 shares of
Common Stock owned by Bomoseen Associates, L.P. and currently exercisable
warrants to purchase 16,250 shares of Common Stock owned by Mr. Stern
individually.
INFORMATION AS TO OWNERSHIP OF SERIES A PREFERRED STOCK BY OFFICERS, DIRECTORS
AND OWNERS OF 5% OR MORE OF OUR SERIES A PREFERRED STOCK
The following table sets forth, as of June 15, 2004, certain
information with respect to beneficial ownership of our Series A Preferred Stock
as of June 15, 2004 by:
o each person known to us to be the beneficial owner of more than 5% of
our common stock;
o each of our directors;
o each of our executive officers; and
o all of our executive officers and directors as a group.
Unless otherwise specified, we believe that all persons listed in the table
possess sole voting and investment power with respect to all shares of our
Series A Preferred Stock beneficially owned by them. As of June 15, 2004,
1,351,640 shares of our Series A Preferred Stock were issued and outstanding.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENTAGE OF CLASS
------------------------- ------------------------ -------------------
Christopher M. Wolfington 1,243,509(2) 92.0%
700 South Henderson Road
King of Prussia, PA 19406
------------------------ -------------------
All Executive Officers and
Directors as a group (4 persons) 1,243,509 92.0%
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. All shares are beneficially
owned and sole voting and investment power is held by the persons named,
except as otherwise noted.
(2) Includes 270,328 shares of Series A Preferred Stock owned by the 2003
Grantor Retained Annuity Trust of Christopher M. Wolfington. Does not
include 54,066 shares of Series A Preferred Stock owned by the 2003
Irrevocable Trust of Christopher M. Wolfington as Mr. Wolfington is not the
beneficial owner of such securities.
29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have engaged IntuiCode, LLC to provide software development services
to us. During the fiscal year ended March 31, 2003, we paid IntuiCode
approximately $88,250, and during the fiscal year ended March 31, 2004 we paid
IntuiCode approximately $117,000 plus reimbursement of $7,154 in expenses. We
acquired the rights to the Protector(TM) from IntuiCode, and paid aggregate
royalties to IntuiCode of approximately $40,965 for the year ended March 31,
2003 and $82,581 for the year ended March 31, 2004. Jeremy Stein, a member of
our board of directors, is also the Chief Executive Officer and the holder of a
significant minority percentage of the outstanding membership interests of
IntuiCode. We believe the terms of IntuiCode's engagement are at least as fair
as those that we could have obtained from unrelated third parties in arms-length
negotiations. In addition, during the year ended March 31, 2004, we extended
short-term loans in the aggregate principal amount of $63,000 to IntuiCode.
These loans are due on demand.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this report.
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation of iGames Entertainment, Inc. (incorporated
by reference to Exhibit 3.1 of the Registration Statement on Form SB-2
filed on January 18, 2002).
3.2 By-laws of iGames Entertainment, Inc. (incorporated by reference to
Exhibit 3.2 of our Registration Statement on Form SB-2 filed on January
18, 2002).
3.3 Articles of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.3 of Amendment No. 1 to our Registration
Statement on Form SB-2 filed on March 8, 2002).
4.1 Form of Specimen Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form SB-2 filed on January
18, 2002).
4.2 Certificate of Designation of Series A Preferred Stock of iGames
Entertainment, Inc. (incorporated by reference to Exhibit 4.1 of
Current Report on Form 8-K/A filed on March 15, 2004).
10.1 Amended and Restated Agreement and Plan of Merger By and Among Money
Centers of America, Inc., Christopher M. Wolfington, iGames
Entertainment, Inc., Michele Friedman, Jeremy Stein and Money Centers
Acquisition, Inc., dated as of December 23, 2003 (incorporated by
reference to Exhibit 2.1 of Current Report on Form 8-K filed on January
20, 2004).
10.2 Stock Purchase Agreement For the Acquisition of Available Money, Inc.
By iGames Entertainment, Inc., from Helene Regen and Samuel Freshman
dated January 6, 2004 (incorporated by reference to Exhibit 2.1 of
Current Report on Form 8-K filed on January 21, 2004).
10.3 Loan and Security Agreement by and between iGames Entertainment, Inc.
and Mercantile Capital, L.P. dated November 26, 2003 (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB for
the fiscal quarter ended December 31, 2003 filed on February 17, 2004).
10.4 Demand Note payable to the order of Mercantile Capital, L.P. in the
principal amount of $250,000 dated November 26, 2003 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-QSB for
the fiscal quarter ended December 31, 2003 filed on February 17, 2004).
10.5 Amended and Restated 2003 Stock Incentive Plan (filed herewith).
10.6 Employment Agreement dated as of January 2, 2004 by and between iGames
Entertainment, Inc. and Christopher M. Wolfington (filed herewith).
10.7 Term Loan Note in the principal amount of $4,000,000 dated January 6,
2004 issued to Chex Services, Inc. (filed herewith).
14 Code of Ethics (filed herewith).
21 Subsidiaries of iGames Entertainment, Inc. (filed herewith).
30
31.1 Certification dated July 12, 2004 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Executive Officer and the
Principal Financial Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Christopher M. Wolfington, Chief
Executive Officer and Chief Financial Officer (filed herewith).
32.1 Certification dated July 12, 2004 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made
by Christopher M. Wolfington, Chief Executive Officer and Chief
Financial Officer (filed herewith).
(b) CURRENT REPORTS ON FORM 8-K
On January 20, 2004, we filed a Current Report on Form 8-K reporting
our merger with Money Centers of America, Inc.
On January 21, 2004, we filed a Current Report on Form 8-K reporting
our acquisition of Available Money, Inc.
On March 15, 2004, we filed an amendment to the Current Report on Form
8-K that we filed on January 20, 2004 to provide the financial statement
information for Money Centers required by Items 7(a) and 7(b) of Form 8-K.
On March 17, 2004, we filed an amendment to the Current Report on Form
8-K that we filed on January 21, 2004 to provide the financial statement
information for Available Money required by Items 7(a) and 7(b) of Form 8-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
During Fiscal 2004, the aggregate fees billed for professional services
rendered by our principal accountant for the audit of our annual financial
statements and review of our quarterly financial statements was $49,500. During
Fiscal 2003, the aggregate fees billed for professional services rendered by our
principal accountant for the audit of our annual financial statements and review
of our quarterly financial statements was $14,500.
AUDIT-RELATED FEES
During Fiscal 2004, our principal accountant did not render assurance
and related services reasonably related to the performance of the audit or
review of financial statements.
TAX FEES
During Fiscal 2004, the aggregate fees billed for professional services
rendered by our principal accountant for tax compliance, tax advice and tax
planning were $2,500. During Fiscal 2003, the aggregate fees billed for
professional services rendered by our principal accountant for tax compliance,
tax advice and tax planning were $2,500. These services consisted of preparation
of corporate tax returns and state and federal tax planning.
ALL OTHER FEES
During Fiscal 2004, there were no fees billed for products and services
provided by the principal accountant other than those set forth above. During
Fiscal 2003, there were no fees billed for products and services provided by the
principal accountant other than those set forth above.
AUDIT COMMITTEE APPROVAL
The Audit Committee pre-approves all audit and non-audit services
provided by our independent auditors prior to the engagement of the independent
auditors with respect to such services. The Audit Committee shall pre-approve
any additional audit services and permissible non-audit services. All "Audit
Fees" and "Tax Fees" set forth above were pre-approved by the Audit Committee in
accordance with its pre-approval policy.
31
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-1
Consolidated Balance Sheet...................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statement of Stockholders' Deficit..............................F-4
Consolidated Statements of Cash Flows........................................F-5
Notes to Consolidated Financial Statements...................................F-7
INDEPENDENT AUDITORS' REPORT
Board of Directors
iGames Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of iGames
Entertainment, Inc. and its subsidiaries as of March 31, 2004, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended March 31, 2004 and 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the financial position of iGames Entertainment,
Inc. as of March 31, 2004, and the results of its operations and its cash flows
for the years ended March 31, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the financial statements, the Company has an accumulated deficit of $10,224,394
as of March 31, 2004 and had net losses and cash used in operations of
$6,634,586 and $158,948, respectively, for the year ended March 31, 2004. This
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 11.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
June 23, 2004
F-1
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 232,018
Restricted cash ............................................... 943,241
Accounts receivable ........................................... 894,218
Loan receivable - related party ............................... 63,000
Prepaid expenses and other current assets ..................... 191,445
------------
Total current assets ......................................... 2,323,922
Property and equipment, net ..................................... 425,221
Goodwill ........................................................ 3,831,104
Intangible assets, net .......................................... 1,949,693
Deferred financing costs ........................................ 130,596
------------
$ 8,660,536
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .............................................. $ 656,300
Accrued expenses .............................................. 325,621
Current portion of capital lease .............................. 17,055
Loans payable ................................................. 2,000,000
Notes payable ................................................. 2,883,083
Lines of credit ............................................... 773,859
Due to officer ................................................ 100,000
Commissions payable ........................................... 358,299
------------
Total current liabilities .................................... 7,114,217
Long-term liabilities:
Capital lease, net of current portion ......................... 43,325
Notes payable, net of current portion ......................... 1,135,417
Lines of credit, net of current portion ....................... 1,664,179
------------
Total long-term liabilities .................................. 2,842,921
Stockholders' deficit:
Preferred stock; $.001 par value, 5,000,000 shares authorized
1,351,640 shares issued and outstanding ...................... 1,351
Common stock; $.004 par value, 50,000,000 shares authorized
4,053,804 shares issued and outstanding ...................... 16,215
Additional paid-in capital .................................... 8,910,226
Accumulated deficit ........................................... (10,224,394)
------------
Total stockholders' deficit .................................. (1,296,602)
------------
$ 8,660,536
============
The accompanying notes are an integral part of these financial statements.
F-2
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
MARCH 31,
-------------------------
2004 2003
----------- -----------
Revenues ........................................... $ 6,980,574 $ 3,211,256
Operating expenses ................................. 6,407,069 2,440,295
----------- -----------
Gross Profit ....................................... 573,505 770,961
Selling, general and administrative expenses ....... 6,398,542 796,807
----------- -----------
Loss from operations ............................... (5,825,037) (25,846)
Other income (expenses):
Gain on forgiveness of debt ........................ - 494,470
Interest expense, net .............................. (264,049) (17,588)
Inventory write-down ............................... (130,883) -
Loss on impairment of intangibles .................. (417,880) -
Gain on disposal of property and equipment ......... 3,263 -
----------- -----------
(809,549) 476,882
----------- -----------
Net income (loss) .................................. $(6,634,586) $ 451,036
=========== ===========
Net income (loss) per common share basic and diluted $ (1.77) $ 0.14
=========== ===========
Weighted Average Common Shares Outstanding
-Basic and Diluted ............................... 3,746,273 3,176,250
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
[Enlarge/Download Table]
iGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Series A
Preferred Stock Common Stock
($.001 par value) ($.004 par value) Additional Total
----------------- ------------------- Paid-In Accumulated Deferred Stockholders'
Shares Amount Shares Amount Capital Defict Compensation Deficit
--------- ------ ------------------- ---------- ------------ ------------ -------------
Balance, March 31, 2002 ........... - $ - 2,057,500 $ 8,230 $ - $ (3,742,881) $ - $(3,734,651)
Sale of common stock and
warrants, net of offering costs - - 633,750 2,535 1,098,015 - - 1,100,550
Issuance of common stock for
services ....................... - - 337,500 1,350 1,005,650 - (62,500) 944,500
Issuance of options for services - - - - 41,330 - - 41,330
Conversion of note payable ...... - - 75,000 300 149,700 - - 150,000
Cancelation of shares ........... - - (2,500) (10) 10 - - -
S corporation distributions ..... - - - - - (126,791) - (126,791)
Stock issued for intangible asset - - 75,000 300 329,700 - - 330,000
Net income ...................... - - - - - 480,274 - 480,274
--------- ------ --------- ------- ---------- ------------ -------- -----------
Balance, March 31, 2003 ........... - - 3,176,250 12,705 2,624,405 (3,389,398) (62,500) (814,788)
Preferred stock issued in
connection with reverse
acquisition .................... 1,351,640 1,351 - - (1,351) - - -
Issuance of common stock for
services ....................... - - 333,804 1,335 643,429 - - 644,764
Issuance of common shares for
intangible asset ............... - - 75,000 300 134,700 - - 135,000
Issuance of shares as collateral
for line of credit ............. - - 250,000 1,000 (1,000) - - -
Issuance of options to employees
and consultants ................ - - - - 5,223,418 - - 5,223,418
Exercise of stock options ....... - - 68,750 275 27,225 - - 27,500
S corporation distributions ..... - - - - - (200,410) - (200,410)
Sale of common stock, net of
offering costs ................. - - 150,000 600 259,400 - - 260,000
Amortization of deferred
compensation ................... - - - - - - 62,500 62,500
Net loss ........................ - - - - - (6,634,586) - (6,634,586)
--------- ------ --------- ------- ---------- ------------ -------- -----------
Balance, March 31, 2004 ........... 1,351,640 $1,351 4,053,804 $16,215 $8,910,226 $(10,224,394) $ - $(1,296,602)
========= ====== ========= ======= ========== ============ ======== ===========
The accompanying notes are an integral part of these financial statements.
F-4
iGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
-------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) ................................ $(6,634,586) $ 451,036
Adjustments used to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on forgiveness of debt .................... - (494,470)
Gain on disposal of property and equipment ..... (3,263) -
Inventory write-down ........................... 130,833 -
Loss on impairment of intangibles .............. 417,880 -
Issuance of options to employees and consultants 5,229,668 -
Common stock issued for services ............... 30,000 -
Depreciation and amortization .................. 384,442 108,751
(Increase) decrease in:
Accounts receivable .......................... (399,695) 1,117,397
Inventory .................................... 1,515 -
Prepaid expenses and other current assets .... (24,856) (6,157)
Other assets ................................. 66,955 -
Increase (decrease) in:
Accounts payable ............................. 214,291 (32,693)
Accrued expenses ............................. 193,399 (344,111)
Commissions payable .......................... 264,469 (7,663)
----------- -----------
Net cash provided by (used in) operating activities (128,948) 792,090
----------- -----------
Cash flows from investing activities:
Cash received in acquisition ..................... 66,000 -
Increase in loans receivable - related party ..... (63,000) -
Purchases of property and equipment .............. (171,988) (25,991)
Purchase of intangible assets .................... (49,556) (35,828)
----------- -----------
Net cash used in investing activities .............. (218,544) (61,819)
----------- -----------
Cash flows from financing activities:
Change in restricted cash ........................ 492,853 (267,930)
Change in bank overdraft ......................... - (5,641)
Net change in line of credit ..................... 1,505,526 557,236
Capital lease obligation ......................... 148,437 -
Payments on capital lease obligations ............ (88,057) -
S corporation distributions ...................... (200,410) (126,721)
Advances to officer .............................. (28,932) -
Exercise of stock options ........................ 25,000 -
Decrease in loans payable ........................ (1,295,051) (739,474)
Deferred financing cost .......................... (57,211) (70,386)
----------- -----------
Net cash provided by (used in) financing activities 502,155 (652,916)
----------- -----------
Net Increase in cash ............................... 154,663 77,355
Cash and cash equivalents, beginning of year ....... 77,355 -
----------- -----------
Cash and cash equivalents, end of year ............. $ 232,018 $ 77,355
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
iGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended March 31,
-------------------------
2004 2003
----------- -----------
Supplemental disclosures:
Cash paid during the year for taxes .............. $ - $ -
=========== ===========
Cash paid during the year for interest ........... $ 264,049 $ 17,588
=========== ===========
Noncash investing and financing activities:
Issuance of notes payable for acquisition ........ $ 6,000,000 $ -
=========== ===========
Issuance of Series A preferred stock for
acquisition ..................................... $ 1,351 $ -
=========== ===========
Acquisition details:
Fair market value of assets acquired ............. $ 203,247 $ -
=========== ===========
Liabilities assumed .............................. $ 143,756 $ -
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
iGames Entertainment, Inc. (the "Company" or "iGames") was originally
incorporated in the State of Florida on May 9, 2001 under the name Alladin
Software, Inc. On June 25, 2001, the Company changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary.
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") by and among Money Centers of America, Inc.
(Money Centers), Christopher M. Wolfington, iGames, Michele Friedman, Jeremy
Stein and Money Centers Acquisition, Inc., a wholly-owned subsidiary of iGames,
Money Centers Acquisition, Inc. was merged with and into Money Centers and Money
Centers, as the surviving corporation, became a wholly-owned subsidiary of
iGames (the "Merger"). For accounting purposes, the transaction was treated as a
recapitalization and accounted for as a reverse acquisition. Therefore, the
financial statements reported herein and accompanying notes thereto reflect the
assets, liabilities and operations of Money Centers as if it had been the
reporting entity since inception. In connection with the Merger, all of the
issued and outstanding shares of capital stock of Money Centers were tendered to
iGames and iGames issued to the Money Centers stockholders an aggregate of
1,351,640 shares of iGames Series A Convertible Preferred Stock, $.001 par value
per share, and warrants to purchase an aggregate of 2,500,000 shares of iGames
common stock, par value $.004 per share, at an exercise price of $.01 per share.
Each share of Series A Convertible Preferred Stock is entitled to ten votes in
all matters submitted to a vote of iGames shareholders and is convertible at the
option of the holders into ten shares of common stock at any time after the date
on which iGames amends its articles of incorporation to increase the number of
authorized shares of its common stock to at least 125,000,000.
The holders of our Series A Preferred Stock have redemption rights that, if
exercised, would require us to redeem our issued and outstanding shares of
Series A Preferred Stock and 2,500,000 issued and outstanding stock purchase
warrants in exchange for the issued and outstanding common stock of Money
Centers of America, Inc.
Money Centers is a single source provider of cash access services to the gaming
industry. Money Centers has combined state-of-the-art technology with
personalized customer services to deliver the best in ATM, Credit Card Advance,
POS Debit, Check Cashing Services, CreditPlus outsourced marker services, and
merchant card processing. The Company believes that the acquisition of Money
Centers will meet the growing trend towards single source providers of products
and services to casinos and other gaming facilities worldwide. This trend
supports our business plan to identify fragmented segments of the market to
capitalize on merger and acquisition targets of synergistic companies that
support our business model. The combined companies will gain wider exposure
within the casino and gaming industry.
Pursuant to the terms of a Stock Purchase Agreement between iGames, Helene Regen
and Samuel Freshman dated January 6, 2004 (the "Stock Purchase Agreement"),
iGames acquired all of the issued and outstanding shares of capital stock of
Available Money, a provider of cash access services based in Los Angeles,
California. The purchase price of this transaction was $6,000,000, $2,000,000 of
which was paid in cash at closing, $2,000,000 of which was paid in cash on April
12, 2004, and $2,000,000 of which is due by issuance of 1,470,589 shares of
iGames common stock or, in cash at the election of iGames on the earlier of (i)
the closing of iGames' acquisition of Chex Services, Inc., (ii) the termination
of that proposed transaction or (iii) June 30, 2004 or, in cash at the election
of iGames, see note 14.
F-7
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION (CONTINUED)
The Stock Purchase Agreement provides for adjustment of the purchase price in
the event that certain of Available Money's customer contracts do not renew or
that the former stockholders of Available Money do not provide iGames with
assistance in obtaining renewals of such contracts.
The primary assets acquired as a result of this transaction are Available
Money's contracts to provide automatic teller machines to 18 customers, 15 of
which are traditional casino operations. The former stockholders of Available
Money retain the right to receive all payments subsequent to the closing date
that relate to services provided by Available Money through December 31, 2003
and are jointly and severally liable for all costs and expenses incurred by
Available Money relating to services rendered on or before December 31, 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments with an original maturity date of three months or
less to be cash equivalents.
b. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated.
c. RECEIVABLES AND REVENUE RECOGNITION
i. ATM AND CREDIT CARD RECEIVABLES
Fees earned from ATM and credit card advances are recorded on the date of
transaction.
Accounts receivable arise primarily from ATM, credit card advances and
check cashing services provided at casino locations. Concentrations of
credit risk related to ATM and credit card advances are limited to the
processors who remit the cash advanced back to the Company along with the
Company's allocable share of fees earned. The Company believes these
processors are financially stable and no significant credit risk exists
with respect to accounts receivable arising from credit card advances. No
allowance was considered necessary at March 31, 2004 and 2003.
ii. CHECK CASHING
Revenue is recorded from fees on check cashing services on the date the
check is cashed. If a customer's check is returned by the bank on which it
is drawn, the full amount of the check is charged as a bad debt loss. The
check is subsequently resubmitted to the bank for payment. If it is
honored by the bank, the amount of the check is recognized as a negative
bad debt. Based upon past history no allowance was considered necessary at
March 31, 2004.
F-8
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, accounts, loans and credit card
receivables, notes, accounts payable and accrued expenses approximate their
carrying amounts because of the short maturities of these instruments.
e. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is calculated by
use of straight-line methods over the estimated useful lives of the assets.
f. ACQUISITION, GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS
On January 6, 2004, the Company closed on the acquisition of the issued and
outstanding capital stock of Available Money, Inc. ("Available Money"). The
acquisition was accounted for under the purchase method of accounting, the
results of operations of Available Money are included in the operations of
the Company from January 6, 2004. The purchase price was $6,000,000. The
initial goodwill recorded on this purchase was approximately $3,800,000. The
carrying value of goodwill as well as other long-lived assets is reviewed if
the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on the
discounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values in accordance with Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("FAS 144"). Management evaluates this balance
on an ongoing basis and has determined that there has been no subsequent
impairment and that the balance of approximately $3,800,000 at March 31, 2004
is a fair estimate.
g. INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"ACCOUNTING FOR INCOME TAXES" under this method, deferred income tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
h. USE OF ESTIMATES
Preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the balance sheets and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
i. DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related debt.
F-9
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
j. ADVERTISING
The Company's policy is to expense advertising costs as the costs are
incurred.
k. STOCK BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting
periods of the option grant. The Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148,
"Accounting for Stock-Based Compensation -Transition and Disclosure", which
permits entities to provide pro forma net income (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants as if
the fair-valued based method defined in SFAS No. 123 had been applied. The
Company accounts for stock options and stock issued to non-employees for
goods or services in accordance with the fair value method of SFAS 123.
l. EARNINGS PER SHARE
The Company has adopted SFAS, No. 128, "Earnings per Share". Basic earnings
(loss) per share is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the per
share amount that would have resulted if dilutive common stock had been
converted to common stock, as prescribed by SFAS No. 128.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment at March 31, 2004 are as follows:
Estimated Life 2004
-------------- ------------
Equipment 5 years $ 714,570
Furniture 5-7 years 60,022
------------
774,592
Less accumulated depreciation (349,371)
------------
$ 425,221
============
Depreciation expense for property and equipment for the years ended March 31,
2004 and 2003 was $139,700 and $95,079 respectively.
F-10
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT (CONTINUED)
The amounts above include equipment under capital leases with a gross carrying
value of $148,437 and accumulated depreciation of $25,936 at March 31, 2004.
4. INTANGIBLE ASSETS AND GOODWILL
Intangible assets at March 31, 2004 are as follows:
Estimated Life 2004
-------------- ------------
Software 10 years $ 9,928
Software development costs 5 years 36,175
Website development costs 3 years 24,000
Contract rights 1-3 years 2,100,306
Goodwill indefinite 3,831,104
Other 3 years 1,627
------------
6,003,140
Less accumulated amortization (222,343)
------------
$ 5,780,797
============
During the year ended March 31, 2004, the Company recognized an impairment loss
on intangible assets of $417,880. The Company made a decision not to pursue
marketing its "slot anti-cheating device" and its casino table game. This
resulted in the write-off the corresponding licenses, trademarks and patents.
Amortization expense, for intangible assets, for the years ended March 31, 2004
and 2003 was $244,742 and $13,672 respectively. Estimated amortization expense
over the next five years is as follows:
Year Amount
---- ------
2005 $ 872,836
2006 573,245
2007 418,575
2008 78,573
2009 1,314
Remaining 5,150
F-11
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE
Notes payable at March 31, 2004 consisted of the following:
2004
-----------
On March 1, 2002, the Company issued a convertible
promissory note to an individual in the principal amount of
$100,000. From July 2003 through December 2003, the Company
repaid $81,500 of this debt. The remaining principal balance
of this note of $18,500 continues to bear interest at 10%
per annum and is due upon demand. $18,500
The Company borrowed $2,000,000 from Chex Services, Inc. to
pay the first $2,000,000 to the former owners of Available
Money. The loan is non-interest bearing and currently in
litigation, see note 14. 2,000,000
This represents the second payment due to the former owners
of Available Money. On April 12, 2004 the Company borrowed
$2,000,000 from Mercantile Capital to satisfy this
obligation. The note with Mercantile bears interest at 17%
and is payable monthly over a 24 month period. This note is
a bridge loan. 2,000,000
This represents the final payment due to the former owners
of Available Money. This obligation is payable by issuance
of 1,470,589 shares of iGames common stock or, in cash at
the election of iGames on the earlier of (i) the closing of
iGames' acquisition of Chex Services, Inc., (ii) the
termination of that proposed transaction or (iii) June 30,
2004. The obligation is currently in litigation, see note
14. 2,000,000
-----------
$ 6,018,500
===========
6. CAPITAL LEASE
Capital lease obligation at March 31, 2004 consisted of the following:
2004
-----------
Obligation under capital lease, imputed interest rate at
12.78%; due in May 2007; collateralized by equipment $ 60,380
Less current maturities (17,055)
-----------
$ 43,325
===========
F-12
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CAPITAL LEASE (CONTINUED)
Future minimum lease payments for equipment acquired under capital leases at
March 31, 2004 are as follows:
2004 $ 23,796
2005 23,796
2006 23,796
2007 1,983
--------
Total minimum lease payments 73,371
Less amount representing interest 12,991
--------
Present value of net minimum lease 60,380
Less current portion 17,055
--------
$ 43,325
========
F-13
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LINES OF CREDIT:
Lines of credit at March 31, 2004 consisted of the following:
2004
-----------
Line of credit, maximum availability of $1,800,000. In
October 2003, the line of credit was amended increasing the
maximum availability to $3,000,000, through May 2005;
subject to various restrictive covenants, interest is
payable monthly at 15% per annum, borrowings are
collateralized by restricted cash and guaranteed by a
shareholder of the Company. The line of credit is also
collateralized by all the assets of the Company, in the case
that the restricted cash is not sufficient to collateralize
the outstanding balance on the line of credit. $ 1,664,179
Line of credit, interest is payable monthly at 9% per annum,
the line is unsecured and due on demand. 153,000
Line of credit, non-interest bearing, the line is unsecured
and due on demand. 202,279
On April 4, 2002, the Company entered into a $150,000
one-year renewable line of credit with a bank, that bears
interest at 6% per annum, with interest payable monthly.
This debt is collateralized by a $150,000 restricted
certificate of deposit that matured on April 4, 2004 and
accrues interest at 1.65% per annum. This debt was paid in
full on April 4, 2004. 149,992
On October 1, 2003, Jeremy Stein, our former chief executive
officer, extended a loan to the Company in the principal
amount of $25,000. Mr. Stein received the funds to provide
this loan from a $25,000 revolving line of credit with
American Express. The terms of this loan are the same terms
as his line of credit with American Express. This debt bears
interest at 8.49% per annum, with interest payable monthly. 23,768
On December 1, 2003, the Company entered into a $250,000
line of credit, due on demand with an asset based lender.
This debt bears interest at the prime rate of interest plus
10%, floating with daily resets, for the actual number of
days that the loan remains outstanding, provided that the
minimum rate on this loan is 14.5% per annum. The Company is
obligated to pay the lender a collateral management fee
equal to one percent of the principal balance of the loan
for each month that the loan is outstanding. In order to
secure the performance of the Company's obligations under
this loan, the Company granted the lender a continuing lien
on and security interest in and to 250,000 newly issued
shares of the Company's common stock. In addition, upon an
event of default under the loan, the Company is obligated to
register the resale of these pledged shares of common stock.
Upon payment in full of all amounts due under the loan, the
lender is obligated to deliver all stock certificates
evidencing the ownership of these shares to the Company for
cancellation. 244,820
-----------
$ 2,438,038
===========
F-14
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT
In April 2002, with the approval of the Board of Directors, the Company
increased its authorized number of common stock issuable from 10,000,000 to
50,000,000 shares $.001 par value per share. Additionally, the Company is now
authorized to issue 5,000,000 of preferred stock $.001 par value per share.
In December 2003 the Company affected a 1- for- 4 reverse stock split. As a
result, the Common stock par value was increased to $ .004 per share. All
amounts shown have been restated to account for this split.
In August 2002, the Company issued 25,000 options to acquire shares of the
Company's common stock to a consultant; such options are exercisable at $0.40
per share and expire threes years from the grant date. The Company valued these
options utilizing the Black-Scholes options pricing model using the following
assumptions: risk free interest rate of 4.25%, volatility of 0%, an estimated
life of three years, and dividend yield of 0%. The Company recognized $41,330 in
noncash compensation relating to the issuance of these options. These options
were subsequently canceled in April 2003, and 25,000 shares of common stock were
issued for services which were valued at the fair market value of $71,000.
In August 2002, the Company issued 6,250 options to acquire shares of the
Company's common stock to an employee; such options are exercisable at $0.40 per
share and expire three years from the date of the grant. The Company has valued
these options at $10,333 or $0.41 per option options utilizing the Black-Scholes
options pricing model using the following assumptions: risk free interest rate
of 4.25%, volatility of 0%, an estimated life of three years, and dividend yield
of 0%.
In September 2002, the Company sold 375,000 units consisting of one share of its
common stock and one warrant to purchase a share of common stock (exercisable at
$4.00) for $2.00 per unit. The Company received proceeds from this stock sale of
$652,500, which is net of offering costs paid of $97,500.
In October 2002, a note of $150,000 was converted into 75,000 shares of the
Company's common stock (see Note 5).
In October 2002, the Company issued 37,500 shares of its restricted common stock
to a director of the Company, who provided both financial and marketing
consulting services. Such shares were valued at the fair market value on the
date of the grant. The Company recorded $172,500 in noncash compensation.
In October 2002, 2,500 shares of the Company's previously issued shares were
cancelled.
During the year ended March 31, 2003, the Company issued 300,000 shares to
employees and consultants for services rendered. Accordingly, the Company has
recorded $772,000 ($0.50-$1.30 per share), net of deferred compensation of
$62,500, in compensation to reflect the issuance of these shares.
In February 2003, the Company issued 75,000 shares of its common stock for the
patent right to its Table Slots product. The shares were valued at the
approximate fair market value on the date of the agreement (see Note 4).
In March 2003, the Company sold 1,030,000 units consisting of one quarter of a
share of its common stock and one warrant to purchase one quarter of a share of
common stock (exercisable at $1.50) for $0.50 per unit. The Company received
proceeds from this stock sale of $448,050, which is net of offering costs paid
of $66,950.
F-15
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT (CONTINUED)
Additionally, the Company issued 1,250 shares of its common stock as part of the
offering costs of this capital raise.
During the year ended March 31, 2003, Money Centers, issued capital
distributions relating to its status as an S Corporation of $126,791.
In June 2003, the Company sold 500,000 units consisting of one quarter of a
share of its common stock and a warrant to purchase one quarter of a share of
common stock (exercisable at $1.00) for $.50 per unit. The Company received
proceeds from this stock sale of $235,000, which is net of offering costs paid
of $15,000.
In June 2003, the Company issued 80,000 shares of its restricted common stock to
consultants for services rendered. The Company valued these shares at a range
between $1.81 and $2.84 per share, the fair market value at the date of grant
and recorded noncash compensation expense of $144,800.
In July 2003, the Company issued 62,500 shares of its restricted common stock to
its Chief Executive Officer, pursuant to the terms of this executive's
employment contract. The Company valued these shares at $2.28 per share the fair
market value on the date of the grant.
In July 2003, the Company issued 25,000 shares of its restricted common stock to
a consultant for services provided. The Company valued these shares at $2.28 per
share the fair market value on the date of the grant. This amount relating to
the sale of the Company's securities has been recorded as an offering cost and
charged against additional paid-in capital.
In July 2003, the Company issued 6,250 shares for the exercise of stock options
with an exercise price of $0.40 and received gross proceeds of $2,500.
In October 2003, the Company sold 100,000 units to a single accredited investor
consisting of one quarter of a share of our common stock and a warrant to
purchase one half of a share of common stock (exercisable at $1.20) for $0.25
per unit. The Company received proceeds from this stock sale of $25,000. None of
the foregoing warrants have been exercised as of the date hereof.
In October 2003, the Company issued 81,750 shares of its common stock to three
consultants for services rendered. The Company valued the shares at the fair
market value on the date of issuance and recorded consulting expense of
$147,690, or between $1.80 and $1.88 per share.
In October 2003, pursuant to the terms of an asset purchase agreement, the
Company purchased the Random X 21 product by issuing 75,000 restricted shares of
common stock to the seller as payment of 50% of the purchase price. The Company
valued the shares at the fair market value on the date of issuance and recorded
an intangible asset of $135,000 or $1.80 per share. The remaining 50% of the
purchase price consisting of 75,000 restricted shares of common stock will only
be granted when the Company has placed at least 150 units of this table game
within casinos under standard licensing/leasing agreements. Management
determined that, as of December 31, 2003, a write-down of the intangible asset
was necessary as the Company's projection of future cash flows indicated an
impairment of $110,000. This amount is included in the Statement of Operations
under the caption (Loss on Impairment of Intangible Asset).
Also, in October 2003, the Company issued 4,542 shares of its common stock to
employees. The Company valued the shares at the fair market value on the date of
issuance and recorded salary expense of $8,175 or $1.80 per share, respectively.
F-16
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT (CONTINUED)
In November 2003, in order to secure the performance of the Company's
obligations under a new line of credit, the Company granted the lender a
continuing lien on and security interest in 250,000 newly issued shares of its
common stock.
In December 2003, the Company issued 30,000 shares of its common stock to two
consultants for services rendered. The Company valued these shares at fair
market value of $43,600 or $1.45 per share.
In accordance with the reverse merger accounting and the recapitalization of the
Company all expense amounts pertaining to iGames, prior to the reverse merger on
January 2, 2004, have been restated as paid-in capital.
On January 2, 2004, the Company issued 2,500,000 warrants to acquire shares of
the Company's common stock and the company issued 1,351,640 shares of Series A
Preferred Stock to the former stockholders of Money Centers of America, Inc. in
connection with the merger; such warrants are exercisable at $0.01 per share and
expire ten years from the grant date.
On January 2, 2004, the Company issued 2,635,000 options to acquire shares of
the Company's common stock to Christopher Wolfington; such options are
exercisable at $0.01 per share and expire ten years from the date of the grant.
The Company has valued these options at $4,453,150 or $1.70 per option utilizing
the intrinsic value pricing model.
On January 12, 2004, one option holder exercised his right to purchase 62,500 at
..40 per share. The company received gross proceeds in the amount of $25,000.
On January 21, 2004, the Company issued 270,000 options to acquire shares of the
Company's common stock to various employees; such options are exercisable at
$0.01 per share and expire ten years from the date of the grant. The Company has
valued these options at $423,900 or $1.57 per option utilizing the intrinsic
value pricing model.
On January 21, 2004, the Company issued 220,000 options to acquire shares of the
Company's common stock to consultants; such options are exercisable at $0.01 per
share and expire ten years from the grant date. The Company valued these options
utilizing the Black-Scholes options pricing model using the following
assumptions: risk free interest rate of 3.5%, volatility of 89.24%, an estimated
life of ten years, and dividend yield of 0%. The Company recognized $346,368 in
noncash compensation relating to the issuance of these options.
On January 30, 2004, the Company issued 25,000 shares of its common stock to a
consultant for service rendered. The Company valued the shares at the fair
market value on the date of issuance and recorded consulting expense of $30,000,
or $1.20 per share.
During the year ended March 31, 2004, Money Centers, issued capital
distributions relating to its status as an S Corporation of $200,410.
Pursuant to the terms of a common stock offering with registration rights, the
company has accrued penalties in the amount of 22,500 shares. The Company has
valued these shares at $24,035.
F-17
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIT (CONTINUED)
Stock option and warrant activity for the year ended March 31, 2004 is
summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2003 1,355,314 $ 4.32
Granted 5,982,500 .18
Exercised (68,750) (0.40)
Canceled - -
--------- ------
Outstanding at March 31, 2004 7,269,064 $ .95
========= ======
The following table summarizes the Company's stock options and warrants
outstanding at March 31, 2004:
Options and
Warrants Outstanding
--------------------------------------
Weighted Weighted
Average Average
Range of Remaining Exercise
Exercise Price Number Life Price
-------------- ------ ---- -----
$2.40 - 4.00 237,500 4.25 $ 3.24
4.00-6.00 1,286,564 2.50 5.00
2.00-2.04 125,000 9.00 2.02
.01 5,620,000 10.00 .01
---------
7,269,064
=========
All outstanding options and warrants are exercisable at March 31, 2004.
Compensation expense, net income or earnings per share would not have changed
had the Company applied SFAS No. 123 instead of APB No. 25.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are as follows:
March 31,
--------------------------
2004 2003
------------ ----------
Deferred tax assets:
Net operating loss carryforwards $ 1,090,000 $ 640,000
Less valuation allowance (1,090,000) (640,000)
------------ ----------
Net deferred tax assets $ - $ -
============ ==========
F-18
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
The net change in the valuation allowance during the year ended March 31, 2004
was an increase of $450,000.
The reconciliation of the income tax computed at the U.S. federal statutory rate
to income tax expense for the period ended March 31, 2004 and 2003:
March 31,
--------------------------
2004 2003
------------ ----------
Tax benefit at federal statutory rate (34%) $ 2,256,000 $ 792,000
Nondeductible stock compensation (1,796,000) (335,000)
Non-deductible expenses (10,000) -
Change in valuation allowance (450,000) (457,000)
------------ ----------
Net income tax benefit $ - $ -
============ ==========
FASB No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on weight of the evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance at March 31, 2004 and 2003 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. At March 31, 2004, the Company has available net operating
loss carryforwards of approximately $3,200,000, which expire in the year 2023.
Certain amounts would be subject to the limitations under Section 382 of the
Internal Revenue Code relating to changes in ownership.
10. COMMITMENTS
a. LEASE COMMITMENTS
The Company leases office space in Minnesota on a month to month basis for
$738 per month.
The Company leases office space in Florida on a month to month basis for
$3,450 per month.
The Company leases office space in Nevada on a month to month basis for
$1,325 per month.
The Company's total rent expense under operating leases was approximately
$66,200 and $9,000 for the years ended March 31, 2004 and 2003,
respectively.
b. CASINO CONTRACTS
MCA operates at a number of Native American owned gaming establishments
under contracts requiring the Company to pay a rental fee to operate at the
respective gaming locations.
Typically, the fees are earned by the gaming establishment over the life of
the contract based on one of the following scenarios:
F-19
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS (CONTINUED)
- A dollar amount, as defined by the contract, per transaction volume
processed by MCA.
- A percentage of MCA's profits at the respective location.
As of March 31, 2004 the Company has recorded $333,299 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not waived
their sovereign immunity.
11. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank accounts which exceed federally insured
limits. At March 31, 2004, the Company had deposits in excess of federally
insured amounts aggregating approximately $1,100,000 at various financial
institutions. The Company believes it has its cash deposits at high quality
financial institutions. In addition, the Company maintains a significant amount
of cash at each of the casinos. Management believes that the Company has
controls in place to safeguard these on-hand amounts, and that no significant
credit risk exists with respect to cash.
For the year ended March 31, 2004, 57 % of total revenues were derived from
operations at 1 casino.
12. DUE TO OFFICER
Amounts due to officer bear an interest rate of 10% per annum, payable monthly
and due on demand.
13. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has an accumulated deficit
of $10,224,394 as of March 31, 2004 and had net losses and cash used in
operations of $6,634,586 and $128,948 respectively, for the year ended March 31,
2004. These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
14. LITIGATION
On March 24, 2004, we filed a complaint in United States District Court for the
District of Delaware against Equitex, Inc. and its wholly-owned subsidiary, Chex
Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we allege that
Equitex and Chex committed numerous breaches of the terms of the November 3,
2003 Stock Purchase Agreement pursuant to which we were to have acquired Chex
from Equitex, entitling us to terminate the Stock Purchase Agreement and receive
a $1,000,000 termination fee and reimbursement of our transaction costs from
Equitex and Chex, that Chex wrongfully and tortiously declared a default under
F-20
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LITIGATION (CONTINUED)
the $2,000,000 promissory note that we issued to Chex in connection with our
acquisition of Available Money, and that Equitex and Chex tortiously interfered
with our relationship with our senior lender. We seek to recover the $1,000,000
termination fee and transaction costs together with significant damages that
resulted from the defendants' breaches and tortuous conduct.
On March 23, 2004, Equitex filed an action in Delaware state court concerning
the same Stock Purchase Agreement at issue in the Delaware federal action that
we filed, alleging that Equitex was entitled to terminate the Stock Purchase
Agreement and receive a $1,000,000 termination fee and reimbursement of
transaction costs. We removed this action to the Delaware federal district
court. We are vigorously defending this action and believe that Equitex's and
Chex's claims are unfounded. We have filed a counterclaim that restates the
claims made in the federal action that we filed. We expect that the two Delaware
federal actions will be combined into a single case.
On March 15, 2004, Chex filed a complaint in the District Court of the State of
Minnesota for the County of Hennepin against us alleging that we defaulted on
interest payments on a $2,000,000 promissory note evidencing our obligation to
repay a loan that Chex extended to us in connection with our acquisition of
Available Money (the "Minnesota Complaint"). The Minnesota Complaint seeks
payment of the principal balance of the loan and accrued interest thereon. Chex
further alleged that we are liable to them for a penalty fee of $1,000,000 as
the result of the alleged termination by Equitex of the November 3, 2003 Stock
Purchase Agreement. We subsequently removed the Minnesota Complaint to the
United States District Court for the District of Minnesota. On June 23, 2004,
the United States District Court for the District of Minnesota transferred this
action to the United States District Court for the District of Delaware. We
anticipate that this action will be consolidated with the other actions listed
above that are pending in to the United States District Court for the District
of Delaware. We are vigorously defending this action, which is still in the
pleadings stage, and believe that Chex's claims lack merit.
In addition, we are from time to time, during the normal course of our business
operations, subject to various litigation claims and legal disputes. We do not
believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
F-21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of Philadelphia, Commonwealth of Pennsylvania.
Date: July 13, 2004
iGames Entertainment, Inc.
By: /s/ Christopher M. Wolfington
--------------------------------
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
In accordance with the Exchange Act, this report had been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
/s/ Christopher M. Wolfington
------------------------------------
Christopher M. Wolfington
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Date: July 13, 2004
/s/ Jeremy Stein
------------------------------------
Jeremy Stein
Director
Date: July 13, 2004
/s/ Barry Bekkedam
------------------------------------
Barry Bekkedam
Director
Date: July 13, 2004
/s/ Wayne DiMarco
------------------------------------
Wayne DiMarco
Director
Date: July 13, 2004
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10KSB’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/31/05 | | 16 | | | | | 10KSB, NT 10-K |
| | 5/31/05 | | 23 |
| | 5/1/05 | | 24 |
| | 9/30/04 | | 11 | | 25 | | | 10QSB |
| Filed on: | | 7/13/04 | | 56 |
| | 7/12/04 | | 33 |
| | 7/8/04 | | 15 |
| | 6/30/04 | | 41 | | 46 | | | 10QSB, NT 10-K |
| | 6/23/04 | | 14 | | 55 |
| | 6/16/04 | | 1 |
| | 6/15/04 | | 15 | | 31 |
| | 5/31/04 | | 23 |
| | 4/12/04 | | 41 | | 46 |
| | 4/4/04 | | 48 |
| For Period End: | | 3/31/04 | | 1 | | 54 | | | NT 10-K |
| | 3/24/04 | | 13 | | 54 |
| | 3/23/04 | | 14 | | 55 |
| | 3/17/04 | | 33 | | | | | 8-K/A |
| | 3/15/04 | | 14 | | 55 | | | 8-K/A |
| | 2/17/04 | | 32 | | | | | 10QSB |
| | 1/30/04 | | 51 |
| | 1/21/04 | | 32 | | 51 | | | 8-K |
| | 1/20/04 | | 32 | | 33 | | | 8-K |
| | 1/12/04 | | 51 | | | | | 3, 425, SC 13D |
| | 1/6/04 | | 18 | | 43 | | | 8-K, 8-K/A |
| | 1/2/04 | | 18 | | 51 | | | 3, 3/A, 8-K, 8-K/A |
| | 12/31/03 | | 32 | | 50 | | | 10QSB |
| | 12/23/03 | | 32 |
| | 12/11/03 | | 14 | | 15 |
| | 12/1/03 | | 48 |
| | 11/26/03 | | 18 | | 32 |
| | 11/3/03 | | 13 | | 55 |
| | 10/27/03 | | 27 | | | | | 4, SB-2/A |
| | 10/1/03 | | 48 |
| | 7/8/03 | | 27 | | | | | 4 |
| | 6/30/03 | | 17 | | | | | 10KSB, 10QSB |
| | 3/31/03 | | 14 | | 53 | | | 10KSB |
| | 11/1/02 | | 28 |
| | 10/14/02 | | 14 |
| | 9/1/02 | | 16 |
| | 4/4/02 | | 48 | | | | | 8-A12G, SB-2/A |
| | 3/31/02 | | 38 | | | | | 10KSB |
| | 3/8/02 | | 32 | | | | | SB-2/A |
| | 3/1/02 | | 16 | | 46 |
| | 1/18/02 | | 32 | | | | | SB-2 |
| | 7/10/01 | | 18 | | 41 |
| | 6/25/01 | | 18 | | 41 |
| | 5/9/01 | | 18 | | 41 |
| List all Filings |
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